Views at a Glance / Income Report; The Wealth Management space is heating up (IFL, PTM, PPT, AMP)

By Market Matters 22 November 17

Income Report; The Wealth Management space is heating up (IFL, PTM, PPT, AMP)

Market Matters Income Update 22nd November 2017

An interesting headline on Livewire this morning that caught my eye from the Head of Large Cap Equities at Paradice Investment Management concluding that; “Now we’re in probably the best period of synchronised economic growth that we’ve seen in the better part of a decade." I interviewed Charlie Aitken from AIM last week (click here to view) who said something similar and at Market Matters we’re also aligned with that view in terms global economic momentum. Wealth management businesses – fund managers – banks – those stocks thrown into the diversified financials bucket typically do well in this type of environment.

In today’s report we’ll look at opportunities, and importantly the threats to existing players in the dynamic financial services sector, and whether or not there are any obvious income plays worth considering. Importantly, this area of the market deserves a lot more attention, not simply in terms of income investing, but more generally for growth and the recent ‘hot ‘ listing of NetWealth, which came onto the market with a 40% premium to the IPO price gives us some insight as to why.

In terms of the MM Income Portfolio over the past week, it was up slightly (+0.34%) versus a market which was up by  +0.49%. Overall, the portfolio has gained 6.67% since inception (5th July 17)  while our cash level has dropped to 6.07%.

The Wealth Management Industry

Approximately 14.8 million Australians have a superannuation account and Australia’s superannuation assets have grown at a compounded annual growth rate (CAGR) of 10% over the last 20 years, a trend that is expected to continue through to 2020. This represented the fourth largest pension asset pool in the world as at 31 December 2016, as shown in the chart below.

Source; NetWealth

This trend is supported by an increase in the number of Financial Intermediaries that are not aligned with or owned by a major bank or large diversified financial institution. As shown in the following chart, the major banks, and the two largest diversified institutions, have seen their aggregate share of Financial Intermediaries decrease by six percentage points between 31 December 2015 and 30 June 2017 as Financial Intermediaries (like advisers) increasingly choose to obtain their own AFSL or join small to mid-size Licensees.  The managed account industry Funds Under Management  (FUM) are expected to grow at approximately 35% CAGR from 2017 to 2020, increasing to $60 billion by 2020 and representing approximately 7% of the total Platform. 

Source; NetWealth

This obviously puts the larger incumbents in a difficult position, however it also highlights to huge opportunity within a sector that we clearly have a vested interest within. In simple terms, the banks have done a poor job at a time when better technology, more customer centric services and true ‘independence’ has become a central part of wealth management. I’ve operated in this industry for more than a decade and have witnessed the huge change that has unfolded, and ultimately, Market Matters came about as result of that change. The scepticism of the banks and larger wealth management groups overlayed with the obvious tailwind of Self-Managed Super has supported the rapid growth within the sector and more recently, in the platform space.

Transparent, independent advice delivered in a cohesive, cost efficient way that allows direct ownership of assets and better control has clearly struck a chord with Australian investors, and we couldn’t agree more.

Here is a an overview of Funds Under Administration (FUA) for a sector still clearly dominated by the major banks along with AMP, IOOF and Macquarie.  As it stands, platforms in Australia have FUA of $675b. The banks plus AMP & IFL have 78% market share. HUB, NWL, PPS and OVH have combined market share of ~4%.

In the chart above, the right hand side of the ledger is more interesting from a growth perspective however the left is more interesting in terms of Income Investing. In terms of growth, Netwealth (NWL) listed this week and has a market cap as of yesterday at $1.2bn, while HUB24 (HUB) is capped around $575m, Praemium (PPS) has a market cap of $250m and Onevue Holdings (OVH) is around $185m – so reasonably small. I am writing the weekly ‘Income Report’ so we clearly should be focussing on the larger cap stocks within the sector that actually pay a dividend. That’s not to say the ‘growth stocks’ above shouldn’t be considered, they are clearly on our radar in their own right, however from an income perspective we need to be looking at them in terms of a potential threat to the income producing incumbents. 

To that end, IFL and AMP are at most risk while the banks have fairly low exposure these days in terms of an overall contribution to earnings from platforms – as shown below.

In terms of IFL, we hold this in our Platinum Portfolio and are very conscious of the trends playing out in the sector, in both terms of overall growth which is a positive and the flow of new players looking to take market share which is a negative. We have banking exposure in the Income Portfolio however as shown above, the threat here is limited. 

IOOF (IFL) Monthly Chart

The stocks in the sector that pay a dividend are outlined below, including the fund managers which are also worth considering. JHG is clearly best value relative to FUM while Platinum (PTM) is clearly the most expensive.

AMP is attractive in terms of income, with a forecast yield of 5.7%  90% franked , however as we’ve suggested in the past, the AMP model seems to have seen its best days. IFL on the other hand mixes (effectively) in our view the combination of scale, independence and technology offering a better overall solution which is being shown through better performance in recent times. It resides in our Platinum Portfolio.

AMP Weekly Chart

In terms of the fund managers, we view Platinum Asset Management (PTM) as hugely expensive (23x)  however concede this is coming on the back of strong performance and subsequent inflows. That wasn’t always the case with PTM down in the dumps only a few short months ago with weak performance and FUM walking out the door. Now that mantle is being taken by Perpetual (PPT) which has had a reasonable fall from grace. Funds management is a cyclical game and a good manager that has a period of weak performance resulting in FUM outflows and a drop in share price can create an opportunity – it certainly did (in hindsight) for PTM earlier this year.

Platinum Asset Management (PTM) Weekly Chart

Perpetual trades on 16x with a 5.6% yield 100% franked. Performance has been weak and this is hurting the share price.  This is now a stock on our radar as an income play, however we are looking for signs of improving FUM before entry given currently low cash levels in the MM Income Portfolio

Perpetual (PPT) Weekly Chart

Platinum Asset Mgt vs Perpetual Weekly Chart

Conclusion

The wealth management space is clearly heating up with strong tail winds over the next few years
As an income play the only candidate at this stage is Perpetual (PPT)
The disruption in the sector will not have a big impact on the banks

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday, or after the session when positions are traded.

Disclaimer

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