Listed fund managers are trying to stave off extinction
Winter has set in for the funds management industry. The new trio of CEOs hired to save their embattled businesses have a near impossible task.
Jonathan ShapiroSenior reporterUpdated Aug 25, 2024 – 3.02pm,first published at 9.29am
The numbers tell a painful story. This time three years ago, the combined market capitalisation of ASX-listed fund managers Magellan, Platinum, Perpetual and Pendal topped $16 billion.
Now, that has dwindled to just $4.7 billion. The bleak winter that the asset management industry was warned about has well and truly set in. Fees have been cut, the big super fund mandates have been pulled, and the market indices they are meant to beat have been even harder to outrun.
The threat is increasingly existential for ASX-listed Magellan, Platinum and Perpetual, which all have new executives at the helm tasked with saving these investment brands.
Meanwhile, a slew of fund closures and a string of deals reveals more than a hint of desperation among privately owned managers who want to sell out, partner up, or find a capital injection before it’s too late.
The questions for investors willing to wade into the sector are whether winter will eventually turn into spring, and what precisely these leaders can do to ensure they survive and prosper? There is no clear answer.
But a starting point is to accept that the asset management sector in its entirety is actually doing just great. The global pool of financial wealth that requires managing has never been larger, and the skills required to do so have never been in higher demand.
The problem is that these three firms have built their brands in the area of the market that has borne the brunt of the disruptive threat: traditional long-only public markets strategies.
This is the most crowded, commoditised and low-value sector of the industry, where a reversal of the downward fee trend is impossible to envisage. In Australia, too few firms have relied on a small pool of perceived talent that has failed to train up the next generation. That is to the detriment of shareholders.
The plight of long-only managers was described as being stuck at sea and dying of thirst: water everywhere, but nothing to drink.
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What’s worse is that what was once a lucrative badge of honour for a funds management business – the ability to win a billion-dollar cheque from a big superannuation fund – is now a business risk.
The new regime in which super funds operate makes them paranoid about falling behind the index and less willing to pay high fees to managers that they demand don’t stray too far from it. That means fund managers can expect to earn slim management fees of 20 basis points – about a fifth of what they can charge retail or advised investors.
In the past 18 months, Maple-Brown Abbott, Magellan-owned Airlie and an undisclosed Fidante fund were all able to secure big mandates from sovereign wealth and super funds.
In the case of Maple-Brown Abbott, it heralded the return to favour of active management when it won money from the Future Fund.
But none of those big wins seemed to do all that much for their business prospects. Last month, Maple-Brown Abbott, the oldest and proudest Australian boutique, was folded into Pinnacle-owned Antipodes. Meanwhile, Fidante reported that profits fell despite the large win because of rising costs and retail outflows.
What’s worse is that for a boutique, a mandate loss can inflict a mortal wound, depriving the fund of the cash it needs to keep the lights on. So, the survival of fund managers now depends on moving away from low-fee-paying institutions that demand low-cost solutions towards the intermediated market, offshore or to wealthy individuals.
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That was the motivation behind $22 billion quantitative fund Vinva’s tie-up with Magellan. Vinva built its business by winning large sums from super funds (it managed $7 billion on behalf of Australian Retirement Trust).
But the big funds were eating up its capacity, and it was only able to charge ever thinner margins. The fund’s profit halved from $72 million in 2017 to $32 million in 2022 despite managing similar-sized assets.
Magellan paid up for the 30 per cent stake in Vinva, by most accounts. But the transaction offers hope that the firm may stand a better chance than its peers of surviving.
That is because Magellan resembles a platform, of sorts, with differentiated strategies that its sales team can distribute, and its back office can administer. Those are the main assets of the large incumbent investment management firms that are well-resourced but short of good product.
For Magellan, Vinva’s quant funds add to its infrastructure, Australian equities and global equities offerings.
Platinum’s new chief executive, Jeff Peters, has fewer options. The strategy is to cut costs and consolidate funds and hope that its one outdated trick – hunting global equity markets for cheap stocks while charging high fees – works again.
Perpetual’s new CEO, Bernard Reilly, has the toughest job. At Australian Retirement Trust he had to manage the billions coming in the door. Now he’s got to stem the tide.
Outgoing CEO Rob Adams has left behind an ungodly mess. His deal spree burdened the balance sheet and has forced the firm to offload its sought-after trust and wealth businesses. What remains is a disparate global empire of public markets managers. These are the most vulnerable to the trends that have devastated the industry.
It is possible to survive and thrive in the current environment. Two ASX-listed funds management businesses have bucked the downtrend and should offer hope there is a viable future.
GQG, Pinnacle find a way
One is GQG Partners, the Fort Lauderdale-based but Australian-listed global fund manager. There are two reasons that it’s been able to do the impossible and raise money as an active long-only equities manager.
The first is that under Rajiv Jain, the funds have delivered investment returns through sound macro calls, and some curious ones, such as a 5 per cent weighting to Nvidia in its emerging market strategy.
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The other is that GQG has been prepared to charge competitive fees. The fund’s average fee take is 48.5 basis points – about half of that charged by Platinum, which runs similar strategies.
The other ASX-listed funds management success story is Pinnacle, which has mastered the multi-boutique model. The firm takes minority stakes in fund managers and grants them autonomy, but provides them with back office and, crucially, sales and distribution support.
For instance, this week Pinnacle took out about 200 of the 1000 seats at a conference well attended by financial planners. As super funds bargain down fees or sack managers to run their money themselves, fund managers are turning to the wealth sector to get paid. The battle for those dollars is as intense as ever.
But to win that lucrative business, they must navigate the all-powerful gatekeepers that are pushing fund managers further down the value chain.
And that part of the market is changing too. The demise of the big dealer groups and the rise of independent financial advisers has increased the power and influence of gatekeepers.
Without the recommended ratings from fund research firms, financial planners cannot and will not put money into funds. Better yet, secure a highly recommended rating or a place in the model portfolio and the funds come gushing in.
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The clearest demonstration of this trend is the performance of Lonsec, which, as of this month, is now fully owned by ASX-listed Generation Development Group. Lonsec provides ratings on fund managers, but its assets under management in its self-managed accounts unit has tripled to more than $10 billion in three years.
Financial planners are increasingly turning to consultants to select their fund managers, implement investments, or use their technology to build client portfolios. They’re now the individuals who make or break a fund manager rather than the small handful of consultants that serviced the big super funds.
Legendary fund manager Kerr Neilson's Platinum Asset Management is one of several highly regarded investors underperforming in a low-rate world.
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Perpetual chairman Tony D’Aloisio and chief executive Rob Adams.
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Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate debt, private equity and investment banking. He is based in Sydney. Connect with Jonathan on Twitter. Email Jonathan at jonathan.shapiro@copyright link
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