Value is emerging in wealth management companies, according to analysts. They say those bullish about global equity markets can buy some proven performers trading at a significant discount. Analysts say planned Federal Government reforms, such as banning trailing commissions in the financial planning industry, amid geopolitical unrest, natural disasters and subdued equity markets have been weighing down wealth management companies.

But funds under management, most notably from superannuation contributions, continue to grow, according to SuperRatings, a superannuation research firm. It estimates superannuation assets totalled $1.32 trillion at December 2010, which includes growth of 7.7 per cent in the 12 months to 2010. It estimates employers, via the 9 per cent compulsory superannuation guarantee levy, and employees topping up their funds are contributing about $10 billion a month to super, with more than half going to fund managers to invest.

Richard Morrow, a director of E.L & C. Baillieu Stockbroking, and Richard Batt, a private client adviser for Shadforth Financial Group, offer their top wealth management stocks which they expect will generate long term value.

Perpetual Limited (PPT)

Chart: Share price over the year to 06/05/2011 versus ASX200 (XJO)

Offering a broad range of investment, superannuation and retirement income products, Perpetual Limited manages investment funds exceeding $27 billion and administers more than $209 billion of client funds as at December 31, 2010. It invests in all major asset classes, including Australian and global shares, fixed income and property. Founded in Sydney in 1886, Perpetual was targeted by US private equity firm Kohlberg Kravis Roberts in October 2010, but takeover talks failed as Perpetual concluded the indicative bid of up to $1.75 billion didn’t reflect the company’s true value. “A brief flirtation with a private equity buyer saw Perpetual’s share price surge above $39,” Morrow says. “However, the courtship was brief and ended in tears, leaving the Perpetual share price in the doldrums below $30, with a market capitalisation of about $1.3 billion.” The company reported a 29 per cent fall in 2011 first half net profit to $35 million. But, looking forward, Morrow sees good value here, particularly if global economies improve. “The company is a high margin business trading on a modest earnings multiple and is completely loveless with investors,” he says. “It pays high dividends and has strong cash flows.”

IOOF Holdings (IFL)

Chart: Share price over the year to 06/05/2011 versus ASX200 (XJO)

It’s a matter of sticking with momentum after IOOF Holdings posted a record underlying net profit after tax of $54.6 million for the six months to December 31, 2010. This represented a 16 per cent increase on the previous corresponding period. On another positive note, the company expects its full-year result to at least mirror its interim result on the back of improving global markets. Morrow says the company is in a strong position after cutting annualised costs by 12 per cent and reducing its platform administration systems from eight to five. Funds under management, administration, advice and supervision were $102.9 billion at December 31, 2010, an increase of $3.8 billion in 12 months. With diverse interests in financial planning, stockbroking, asset management and trustee services, Morrow says IOOF is a comfortable fit for long term portfolios, while generating an attractive fully-franked dividend yield above 5 per cent along the way.

AMP Limited (AMP)

Chart: Share price over the year to 06/05/2011 versus ASX200 (XJO)

AMP’s acquisition of AXA Asia Pacific has created a wealth management and life insurance behemoth. The combined entity has about $130 billion in funds under management. The company says it has 2900 self employed or employed planners and advisers and relationships with 6000 independent financial advisers. It employs thousands of people in Australia, New Zealand and Asia, with plans to increase its presence in Asia. Morrow expects AMP share holders to benefit from the company’s increasing size and reach in wealth management and from extracting cost-saving synergies from the merger. “This is a tremendous coup for AMP, which has become a $16 billion market cap behemoth of the domestic financial services landscape, the ultimate gorilla in the financial services sector.”

Treasury Group (TRG)

Chart: Share price over the year to 06/05/2011 versus ASX200 (XJO)

Richard Batt likes the Treasury Group model. It invests in boutique asset management businesses and assists them to grow by providing administration services and business support. The company recently reported positive net inflows of $852 million for the March quarter.  Total funds under management at March 31, 2011 were $16.81 billion, representing an 8.4 per cent increase on the previous quarter and a 7.4 per cent rise over the past 12 months. “The company is in excellent shape with no debt,” Batt says. “It offers a strong management team, and should be able to deliver long term earnings growth as it invests in new boutique managers.”

Hunter Hall International (HHL)

Chart: Share price over the year to 06/05/2011 versus ASX200 (XJO)

Batt says Hunter Hall International is a boutique equity fund manager seeking to create wealth via careful and responsible investments. For instance, listed ASX companies in the Hunter Hall Value Growth Trust include Sirtex Medical, gold company St Barbara and M2 Telecommunications. Also included are US wireless technologies company InterDigital and optical components firm JDS. Hunter Hall avoids investing in weapons, tobacco and gambling companies, among others. Batt says the company does have a strong track record of outperformance and will benefit from growing superannuation contributions. The share price performs best when equity markets rally as funds under management increases. He says the share price is down about 15 per cent from its 12 month high of $6.66 in April last year. Those with a bullish outlook for the Australian economy should be rewarded over time from investing.  An attractive fully-franked dividend yield of about 9 per cent is forecast in 2012.

Challenger Limited (CGF)

Chart: Share price over the year to 06/05/2011 versus ASX200 (XJO)

Challenger Limited is a diversified financial group. It issues annuities and offers listed and unlisted investment products and services. Batt says the company’s products are distributed via a large network, including independent financial advisers. “The company is focusing on leveraging its business to benefit from superannuation growth,” he says. Batt says Challenger’s assets and funds under management were $27 billion at March 31, 2011, an increase of 22 per cent on the same time last year. The company’s boutique funds group is experiencing strong inflows, which Batt says should improve profitability. The share price hit a 12-month high of $5.21 in February, but has since retreated. “Price weakness provides an opportunity for investors to establish a holding in a company that will benefit as more baby boomers begin retirement,” Batt says.

Perpetual Limited (PPT) $28.50
IOOF Holdings   (IFL) $6.91
AMP Limited (AMP) $5.29
Treasury Group (TRG) $4.45
Hunter Hall International (HHL) $5.68
Challenger Limited (CGF) $4.68

Price current to market close, 4 May 2011

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