A recurring theme of this column over the past two years has been to increase exposure to international equities, principally United States shares. In June, I extended that theme to ASX-listed wealth managers that provide exposure to overseas shares.
My interest in wealth managers was based on their leverage to improving global equities markets and expected stronger inflow into international equities funds as investors, such as Self-Managed Superannuation Funds, finally lift their low offshore share exposure.
I wrote on June 16 for The Bull: “Mid-cap wealth-management stocks such as Magellan Financial Group, BT Investment Management, Platinum Asset Management and Henderson Group Plc appeal. None of them is cheap, but recent price weakness after strong gains provides a better entry point for medium-term investors.
“Of those, I favour Magellan and Platinum. Both are ‘go-to’ international equities managers for advisers (particularly Magellan in recent years) and have excellent leverage to continued gains in global markets in the next 18 months. Platinum offers the best value.”
Magellan has raced from $11.19 to $13.15 since that column. It reported a 71 per cent increase in after-tax net profit to $82.9 million for FY14, broadly in line with market expectations. A 104 per cent increase in average funds under management to $19.1 billion underpinned the strong result. Those inflows were despite Magellan’s main funds underperforming their benchmark indices over one year, although they are still near the top of their peer group over long periods.
Chart 1: Magellan Financial Group
JP Morgan has a 12-month price target for Magellan of $12.65. Macquarie has a $14.91 target, and an outperform recommendation. It’s hard to be bearish given Magellan’s rising fund inflows and greater investor interest in international equities.
The big caveat is fund performance. Magellan’s underperformance since late 2013, after a period of strong outperformance, is a slight concern. Persistent underperformance would hurt fund inflows and cut earnings, although the market – and clients- do not seem concerned, judging by fund inflows and Magellan’s price gains. Higher cost growth, with more employees hired, was another concern.
Amid Magellan’s strong gains, it is easy to overlook the doyen of international equities, Platinum Asset Management. After more than doubling from $3.50 in mid-2012 to a 52-week high of $7.75, Platinum has fallen to $6.31. It traded near those levels when I last covered it for The Bull.
Chart 2: Platinum Asset Management
Platinum’s key funds are starting to outperform their benchmark indices after a period of average performance, by its standards, over the past few years. It had strong outperformance in the June quarter. At $6.31, it trades on a forecast Price Earnings (PE) multiple of about 18 times FY15 earnings, according to consensus earnings forecasts. Magellan trades on a broadly similar multiple.
Like Magellan, Platinum enjoyed strong growth in funds and profits. Total revenue rose 38 per cent to $240 million for FY14, and after-tax net profit leapt 47 per cent to $190 million – broadly in line with market expectations. Funds under management grew from $16.8 billion to $22.3 billion, and a strong life performance fees was a highlight. A 55 per cent lift in the full-year dividend also impressed. Platinum fell slightly after the result.
Although similar growth in performance fees may not continue, I expect Platinum to have another good year in FY15 – possibly stronger than the market expects. A bull market in international equities, greater interest in offshore shares, and the potential for a lower Australian dollar, could create an earnings sweet-spot. Higher fund inflows, rising markets and potential fund outperformance could swell its asset pool, and earnings.
Morningstar has a fair value of $7.50 a share for Platinum and an accumulate recommendation. It wrote after the report: “Platinum benefits from durable competitive advantages due to a strong and respected brand, long-term investment outperformance and access to a large retail distribution network via independent financial advisors”
Platinum offers better value than Magellan at current prices, although it is hard to go past both stocks for long-term portfolios seeking greater exposure to listed wealth managers as the US bull market rolls on, and as other offshore equity markets pick up the pace.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at August 21, 2014.
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