It is hard not to like wealth-management stocks as global equity markets rise. Higher fund inflows and rising equity prices lead to greater assets under management and fees. Longer term, mandated growth in superannuation is a huge industry tailwind.
This column identified Magellan Financial Group and Platinum Asset management for The Bull in June 2014, at $11.59 and $6.49 respectively. They have since rallied to $19.66 and $8.05 as money flows into their international equity funds – an investment hotspot in the past 12 months.
I wish the column had taken a stronger view on another wealth manager, Henderson Group PLC, last year. The UK-based fund manager has rallied from $4.45 in June 2014 to $5.34 and emerged as one the market’s best-performing mid-cap stocks. It was at $1.50 in June 2013.
Chart 1: Henderson Group PLC
The easy response is avoiding Henderson after such strong price gains. But Magellan shows how far top wealth managers can run when strong fund performance coincides with rapidly rising demand for their fund category, in this case international equities.
To recap, Henderson, also listed on the London Stock Exchange, provides investment-management services in Europe, the United Kingdom and the United States. It manages a range of institutional and retail funds across the main asset categories.
The catalyst for Henderson’s strong share prices is fund performance. At its latest half-year result, it said 83 per cent of its funds had outperformed their benchmark index over three years.
Total assets managed were 81.2 billion pounds in FY14, from 75.2 billion pounds a year earlier, and Henderson said it gained market share in each quarter. It continues to win large investment mandates in the UK and is broadening the business into the US.
In an insightful sector review published last week, investment bank Citi said Henderson was the pick of ASX-listed diversified financial stocks, It had buy recommendations on Henderson and Challenger Financial Group – another wealth manager this columnist favours- and neutral recommendations on Perpetual, IOOF Holdings, Computershare and ASX.
Citi said it was hard to find value in the sector after strong share-price gains, but that it remained hopeful of “refining the entry point for several stocks if the market corrects.” Put another way, investors should buy these stocks during a broader market pullback.
Citi said Henderson had started 2014-15 well with strong fund inflows. New products, an expanding production distribution team and new fund mandates are driving growth. It has capacity to grow the business, without huge extra cost, by adding new funds. Also, Henderson noted increasing interest in its Global Equity Income Fund from Australian investors. Like other wealth managers with a global focus, it is in the right place at the right time.
Citi wrote: “We remain positive on Henderson’s medium-term growth story and continue to largely back it to achieve a doubling of assets under management between 2013 and 2018, with an expanding operating margin … Despite a strong share price rally, Henderson continues to trade at a modest P/E (Price Earnings) discount to its more direct UK peers.”
Citi’s 12-month share price target of $5.70 compares with the $5.34 price. Macquarie Equities research has a $5.50 target and an outperform recommendation. Morningstar’s $5 fair value suggests Henderson is slightly overpriced, and it has a hold recommendation. At the current price, it should yield about 3.5 per cent in FY15, unfranked.
The market is generally bullish on Henderson. Eight analysts have a strong buy or buy recommendation on it, and one has a hold, in Thomson/First Call consensus forecasts.
As a mid-cap stock, Henderson suits long-term investors comfortable with slightly higher risk. The loss of key personnel and regulatory risk in the UK are key issues. The recent departure of director of European equities, Richard Pease, highlights the challenge to keep top people.
Henderson is best bought on price weakness. Gains should be slower from here, but there’s a lot to like about its fund performance, inflows and strategy as its market enters a sweet spot.
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 March 20, 2015.