It is easy to like the long-term prospects for high-quality wealth managers. An ageing population and mandated superannuation contributions are huge industry tailwinds, and the best companies, thanks to their annuity income, can provide exceptional earnings growth.
This column’s positive view on Platinum Asset Management, Magellan Financial Group and, more recently, UK-based manager Henderson Group PLC, was outlined in ‘Good Stocks to Buy in the Cheap’, in The Bull in June 2014.
Platinum’s one-year total shareholder return (including dividend reinvestment) is 25 per cent to June 30, 2014. Magellan has delivered 52 per cent; Henderson is up 22 per cent, and BT Investment Management has returned 33 per cent, Morningstar data shows.
Each had done better before the sharemarket sell-off in May and June, although few investors would complain about those gains in a skittish market.
Others could be forgiven for still avoiding the wealth managers at this price. None are cheap and are strongly exposed to general sharemarket conditions through their funds under management. But the wealth managers have better prospects than most mid-cap stocks and will benefit from further gains in global equity markets when the current pullback subsides.
BT Investment Management appeals after recent price weakness. From $10.97 in early April, BT has fallen to $8.50. The broader market sell-off and Westpac Banking Corporation’s decision to sell down its 59 per cent holding in BT to between 31 and 41 per cent, weighed on investor sentiment, although the wealth manager was due for a pullback after such strong gains.
Chart one: BT Investment Management
BT is approaching value territory. Westpac’s decision, mostly likely about freeing up capital, should help BT in the long run. The market digested the news comfortably, and the Westpac selldown was completed at $8.20, near the top end of the book-build range ($7.50 to $8.40 a share).
The Westpac sell-down should bring more institutions to BT’s register, lift the diversity of its shareholder base, provide a higher free float of shares, and help it with inclusion in key indices, such as the S&P/ASX 300 index and possibly the ASX 200, depending on BT’s share liquidity. In theory, that should attract more exchange-traded products and active funds to BT.
BT relies heavily on Westpac and its subsidiary banks to distribute its products, but the sell-down should not affect that strength.
BT’s two-month trading update, released in June, showed $1.5 billion in net inflows because of strong demand for global equities. The new inflows took total funds under management (FUM) to $80.7 billion and some brokers lifted their earnings for BT to account for higher FUM and fees. But the share price fell.
BT compares favourably with Platinum and Magellan on valuation metrics. At $8,50, it trades on a Price/Earnings (PE) multiple of 14.1 times 2015/16 earnings, consensus analyst estimates show. Platinum and Magellan trade on a multiple of almost 18 times.
It’s hard to justify why BT trades at such a significant discount to its nearest listed peers. It has solid fund performance, good earnings growth prospects, diversity in operations and earnings, and its British-based JO Hambro Capital Management business – the key to BT’s medium-term prospects – continues to kick goals. BT has also had stronger net FUM inflows in the past two months than Magellan, on some brokers’ estimates.
The market, however, seems unconvinced. Of the 10 brokers that cover BT, four have a hold recommendation, four have an underperform and only two have a buy. Recommendations were lowered this year as the BT share price rallied.
Morningstar, for example, has a fair value of $8.50 for BT and rates it a hold. The consensus mean price target for BT is $9.90, with forecasts ranging from $8,50 to $12.50.
This wide dispersion of forecasts is unusual for a stock such as BT. Its sharp rise in the fourth quarter of calendar-year 2015 caught the market off-guard, as did its 22 per cent fall from the 52-week high this year.
It would not surprise to see BT shares fall further in this volatile market as China’s economic slowdown and Greece’s likely exit from the European Union fuel the bears.
However, continued price weakness would be an opportunity for long-term investors to enter BT at a more attractive price, and add more portfolio exposure to wealth management.
There’s a lot to like about BT’s improving operational performance, exposure to UK investment markets, and better valuation, but no urgent need to buy just yet, as markets digest a slew of negative macroeconomic news in the next few weeks.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. 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 July 1, 2015.