Morningstar is confident that, if Perpetual achieves strong fund performance, it will be able to recover its share price and reassure investors’ doubt over the Pendal merger.
In an equity analyst note, the research firm said there are concerns in the market about the success of the merger with Pendal earlier this year.
In its FY23 results, the asset manager reported $8.1 billion in outflows from its asset management business as a result of cautious investor sentiment and volatile equity markets. Most outflows came from the institutional channel and US equity mandates managed by Barrow Hanley, JO Hambro and TSW, offset by net inflows and strong performance into Trillium funds.
“Investors are wary of Perpetual’s poor recent flows, which were weak even before its merger with an equally sluggish Pendal. The combined entity has failed to reverse outflows, creating doubt about the merger’s benefits,” Morningstar said.
“Due to operating leverage, a drop in flows has a significant negative impact not only on earnings but also on debt coverage.”
Shares in Perpetual have fallen 15 per cent in the last 12 months to 17 October compared to gains of 6 per cent by the ASX 200.
In its Q4 FY23, the firm recorded net outflows across equities, fixed income and multi-asset at a greater volume than in Q3, with equities seeing $4 billion in outflows compared to just $1 billion in Q3.
However, Morningstar is hopeful solid fund performance in asset management should slow these outflows and reverse redemptions, as well as alleviate concerns about team stability after the Pendal merger.
In the last three months, 56 per cent of its funds have outperformed peers, rising to 64 per cent for its cash and fixed income funds.
Last month, it announced the $613 million Pendal Concentrated Global Share Fund will move to investment manager Barrow Hanley from 31 October, and the Perpetual Global Innovation Share Fund will be closed down on 24 October. These moves resulted in the exit of portfolio managers Ashley Pittard and Thomas Rice as well as the departure of small-cap manager Jack Collopy in May.
The research house said: “Most strategies are outperforming peers. This boosts the odds of winning new mandates, being included in model portfolios and/or obtaining favourable fund ratings.
“Downside potential to earnings due to product overlap from the merger are overexaggerated. The risk of cannibalisation is low for most products, those with greater overlap – cash, fixed interest and multi-asset – make up less than 15 per cent of asset management revenue.”
In FY23, its largest proportion of funds under management was held in its global equity funds followed by US equities and Australian equities with global equities, in particular, gaining market share in the year. The proportion of global equity FUM was up from 19 per cent of total FUM to 33 per cent in FY23.
This greater product variety offer would aid revenue growth by attracting a diverse clientele and enabling cross-selling while higher margin, non-traditional products like ESG and emerging markets would support profitability and combat passive competition.
“In our base case, asset management outflows should moderate starting late fiscal 2023 with operating margins improving compared with fiscal 2023,” Morningstar concluded.
Since the FY23 results, Perpetual has restructured the leadership of its asset management team to form one global division led by chief executive Rob Adams. Amanda Gillespie will continue to lead asset management in Australia, and Adam Quaife will lead global distribution – both will join the group executive committee.
