I do not remember the details, but KAM does have one of the best fee structure out there. Almost like a hedge fund while they run mutual funds. KAM itself will have very bumpy earnings, but it has a fee structure which enables them to earn a very large performance fee once they hit a good year. IMHO, that is the where the intrinsic value lies. KAM is actually a wonderful business if it outperforms year after year.
The common problem with an asset manager is that once it underperforms, investors just vote with their feet. And the current trend with passive investing is not helping either. FID's AUM is much more sticky than KAM, but scaling wise, is less significant in a good year. That said, we should expect FID to grow earnings steadily, but it has less upside in a big bull market.
FID is also different from KAM because it outsources its fund management function, and focuses on gathering assets. And when the FUMAA goes up, the benefit will flow mostly to shareholders, instead of 'talented' fund managers. Mr. Singh runs a very tight ship and he has a lot of skin in the game. I once talked to his son, and he said they were acquiring those FA businesses at 4x EBIT. It is really a shame they could not do more.
FID is focusing on capturing the full value of its FUMAA. Think about this way. They gather assets through their FA network and accounting practices. And then they funnel them into their fund management arm and administer the funds themselves using their own software platform. It makes a lot harder, well maybe not that hard, for a client to switch. A personal, and long term relationship with your advisors is the key to retain your customers through thick and thin. If you customers want to achieve certain financial goals in the long run, they will not behave like a typical KAM customer who are looking at performance every month and compare it to other funds. IMO this makes both parties better off.
I long FID because it is not only undervalued, it is also going to be a great compounder over the next 10 years. The superannuation funds, by some estimates, will grow 12.1% compounded annually over the next 25 years to reach 40 trillion by 2040. This is a very strong tailwind behind every single company in this sector.
I also like the fact FID is growing its FUMAA in a battered market. Almost all major stock market broke to new highs, while AU is an exception. The headwind today might become a strong tailwind in a few years. We will see.
With all these factors combined, FID is a safe yet compelling investment today if you have a long time horizon like mine.
FID Price at posting:
$2.04 Sentiment: Buy Disclosure: Held
