Morningstar optimistic for improved outcomes under merged Platinum-L1 manager
Recommending Platinum shareholders to enact the merger with L1 Capital, Morningstar has said it expects the combined firm will be able to moderate outflows and facilitate diversity in product range.
It was announced on 8 July that Platinum had entered a binding agreement with global long-short equity manager L1 Capital to merge, and an extraordinary general meeting (EGM) is due to be held on 22 September. If approved, the deal will create a fund manager with a combined $16.5 billion in assets under management.
An independent report noted the merger would allow duplicate cost reduction, consolidation of functions, better cross-selling opportunities, positive influence on ratings, and faster introduction of new investment products.
With L1 Capital taking control of the investment management, this could also improve the performance of Platinum funds and reduce outflows. While some outflows are likely in the short term, they are expected to moderate over the medium to long term.
Over one year to 30 June, the underperforming flagship Platinum International Fund has returned 3.4 per cent compared to gains of 18.4 per cent by its benchmark of the MSCI World Index. Assets on this fund stand at $3.3 billion as of 30 June, down from $5.6 billion at the end of FY24.
If L1 Capital opts to scrap underperforming funds, this could lead to redundancies and team instability, however, and a more cautious stance by research houses.
The firm has already seen several changes in its investment team this year, with portfolio manager Douglas Isles departing, co-chief investment officers Clay Smolinski and Andrew Clifford changing up their roles, and former co-founder James Simpson returning to run an investment oversight group.
Commenting on the deal ahead of the EGM, Morningstar equity analyst Shaun Ler said: “We recommend voting in favour of Platinum-L1 Capital. While the combined group still lacks an economic moat, the merger is likely to halt Platinum’s recent profit decline, ignite modest earnings growth as a larger group over the long term, and generate more maintainable dividends.
“We expect long-term operating margins to increase, driven by cost reductions and reduced outflows. Risks of outsize mandate losses or cost inflation, resulting from competition and potential team stability concerns, always exist. But they are adequately reflected in the current stock price.
“The combined entity will have greater asset class and client diversity, facilitating cross-selling and customer retention. This should help stabilise FUM and improve earnings, mainly from cross-selling L1 Capital’s products to Platinum clients (vice versa being unlikely).
"Moreover, having a larger capital base, a broader investor network, and improved operating leverage could also enable faster rollouts of new products, which typically have to be seeded and run on a pilot for extended periods. This helps the group to maintain its relevance among investors who are today spoiled with extensive investment choices.”
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Laura Dew
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