Pendal Group has reported a reduced profit on the previous year, for the first time in eight years, with a cash net profit after tax (NPAT) of $163.5 million, down by 19% over the year to 30 September 2019.
Pendal chair, James Evans, said this was a result of cautious investor sentiment, ramifications of the Royal Commission, and reduced fees.
The FY19 results announced on the Australian Securities Exchange (ASX) said funds under management (FUM) was also down 1% to $98.8 billion, an 89% reduction in performance fees to $5.98 million, and base management fees were down 4% to $482.6 million.
Evans said there were significant shifts out of equities and into bonds, which affected both flows and margins, and the majority of outflows were from its European equity strategies – a direct result from Brexit and trade tensions.
On the Royal Commission, Evans said investor trust and confidence had affected flows across the financial services industry and the diversified financials sector had experienced a de-rating in Australia.
Pendal’s chief executive, Emilio Gonzalez, said: “The 2019 Financial Year has been one of the toughest on record for Pendal, with investor caution about the word’s prospects exacerbated by ongoing geopolitical turmoil”.
“Despite record market levels in some regions, investors have become more risk averse, which has affected flows into our own investment strategies. A number of our key strategies have also underperformed.
“Pleasingly, our range of funds in the US continue to be well supported, and across the group we are getting good traction on our income-generating strategies. In Australia, there were good institutional flows of $2 billion, predominantly into cash and fixed interest, and US flows into the JO Hambro Capital Management (JOHCM) multi-asset strategy were very encouraging.”
However, it was JOHCM that impacted the group’s result with its significant reduction in performance fees.
In terms of FUM, the two significant drivers of net outflows was the $3.3 billion redeemed from the Westpac portfolio due to the ongoing run-off of the legacy book as well as further transitioning of corporate superannuation portfolios. There were also notable outflows from European equities of $2.7 billion.
The Pendal announcement noted that it was a particularly difficult year for active management due to interest rate declines and global bond yields that fell sharply leading to a surge in outstanding negative yield debt.
“This turbo-charged asset markets in a way that distorted them, with growth outperforming value, large cap outperforming small caps, and a substantial outperformance of bond proxies creating a narrow market,” Pendal said.
“This confluence of factors negatively affected a number of Pendal Group funds, which underperformed during the year.”
However, Gonzalez said the firm’s financial strength and strong cash flow positioned it well to invest for growth and take advantage of opportunities.