The pandemic impacted the global financial market and investments across asset classes. Fund houses faced larger redemptions but able to weather the storm through portfolio rebalancing and cut-down illiquid assets and international market exposure. The Equivalent Equity Exposure, developed by The Future Fund, showed an average reading of 55 in 2019-20 which implies an elevated risk environment in Australia. The market experienced rapid sell-offs and slow recoveries in H1 2020 with The ASX 200 Index declining 10.4%. The mid-cap and small-cap funds witnessed larger drawdowns, according to the S&P.
Through monetary easing and fiscal stimulus by the government, the market across the globe bounced back during the second half of 2020. The ASX Midcap 50 Index posted strong one-year returns of +30.87% over The ASX 200 Index of +17.00%.
Figure 1. Markets Showing Recovery with Positive Returns by Mid-Cap and Small-Cap Index:
Source: Refinitiv (Thomson Reuters) as on the close of 8 March 2021
As per the data released by the Australian Bureau of Statistics, Australia witnessed momentum in funds under management with managed funds that grew by 4.4% to reach ~$4 trillion in December 2020 over the preceding quarter. The development of vaccines, optimism on the economic recovery, and supportive monetary policies made investors a comeback.
Superannuation or pension funds stand tall with an overall share of 77.4% in total managed funds to ~$3.1 trillion as of December 2020. Australians were benefited from increased weekly allowances and pensions by the government along with various other stimulus packages that helped to push median net worth to $614,000 in June 2020 quarter, up from $563,000 in March 2020 quarter. This resulted in higher contribution by retail investors in a public unit trust which had shown upward movement with +3.7% to $432 billion (on QoQ).
Insurance companies followed a conservative approach throughout the year with investments heavily weighted towards interest-bearing investments. Low-interest rates continue to reduce insurer’s interest income on these investments. Funds from life insurance companies saw a 1.1% growth in December 2020 quarter to reach $128 billion.
Figure 2. Managed Funds Has Been Upward Trending Since June 2020:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Due to the global meltdown in the financial markets, retirement savings took the hit with a fall in the value of listed and unlisted assets during February and March 2020 periods. The government opened an early release scheme for superannuation (till December 2020) which had put redemption pressure due to the uncertainty in the macro-environment. However, as the economy stabilized, net contributions turned positive and showed a steady increase in the subsequent periods. Total superannuation assets surged 5.4% in December 2020 quarter to reach $3.04 trillion over the preceding period. Contributions grew $29.5 billion in the December 2020 quarter. The five-year average annualized return stood at 6.7% in December 2020 quarter, up from 6.0% in the preceding quarter.
Figure 3. Surge in Superannuation Funds Supported By Positive Net Contributions:
Data Source: The Australian Prudential Regulation Authority, Chart Created by Kalkine Group
Due to the unprecedented rise in pension withdrawals, fund managers have increased allocation to cash deposits during the pandemic. The share of deposits to total assets increased to 9.9% in March 2020 as compared to 8.2% in December 2019. The upward trending housing prices in Australia also saw an increase in allocation to land and buildings to 10.9% in March 2020 quarter (vs. 10.3% in December 2019). As the stock market recovered and remain steady, fund managers resumed portfolio allocation to equities, increasing to 17.4% in December 2020, the highest levels since June 2018. Bond allocation broadly remains unchanged as a bond purchase program by the government makes yields unattractive. Fund managers also diversified portfolios with increased exposure to hedge funds, commodities, and derivatives, albeit in smaller size.
Figure 4. Increased Allocation to Equities Following Revival in Stock Market:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Australia’s independently managed sovereign wealth fund, The Future Fund, generated 3-year solid returns of +7.8% during the height of the pandemic in March 2020. Fund managers took onerous steps in portfolio rebalancing and diversifying to alternative assets. The Future Fund serves as a conduit to the Australian government (with a corpus of $171 billion) for investments in various government-led projects. The fund has been recognized for AsianInvestor's 2020 Institutional Excellence Awards for alternative asset investing. The fund has increased the exposure to alternative assets in March 2020 to 14.7% (from 13.4% in December 2019). Allocation to property and infrastructure assets and debt securities were also increased, contributing to positive returns. The fund gradually upsized the allocation to Australian equities in December 2020 to 7.0% and cut down exposure in developed markets and private equity asset class.
Key Risks: Rising aged demographics posted a threat to superannuation withdrawals. According to The Australian Prudential Regulation Authority, the number of accounts for members over 65 age has increased from 7% to 11% over the past five years. The investible surplus of insurance companies is largely influenced by claims ratio and existing solvency levels. Ongoing trade tension and geopolitical risks may cause volatility and affect investment returns. Roll-back of Jobskeeper program and other government stimulus plans may invariably affect household wealth creation and may influence contribution to unit trusts.
Figure 5: Key Risks Affecting Investments and Market Returns:
Source: Analysis by Kalkine Group
Outlook:
With debt and equity markets rebounding in Australia, there was a marked increase in the amount of capital raised off-late. The Australian Bureau of Statistics showed that private capital expenditure improved by 3.0% in December 2020 quarter over the preceding period. This indicates that more companies will access capital through fundraising in the stock market and debt issuances which brings fortunes to investors going forward. As mentioned by Macquarie, markets to see more listings given the accelerated growth of M&As off late. Increasing urbanization, strong infrastructure support by the government with a $110 billion program, and a zero net carbon commitment target by 2050 will boost foreign investment activity in Australia. The Australian REIT has attracted substantial investments from offshore funds in recent times and posted strong performance during the pandemic in the second half of 2020 with +21.2% returns. Considering the developments and traction in investment activity, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Magellan Financial Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 7.89 Billion, Annual Dividend Yield: 5.09%)
Launch of New Funds and Institutional Inflows Favoured Performance: Magellan Financial Group Limited (ASX: MFG) is an investment management company with worldwide customers. The company invests in global equities and listed infrastructure. MFG reported a 26% increase in funds under management to $95.5 billion in FY20. Management and services fees revenue improved by 25% to $591.6 million. Share of asset allocation to global equities has increased from 74% in FY19 to 77% in FY20. The average base management fee remained unchanged at 62 bps. The company’s Airlie Australian Share Fund commenced trading on ASX with effect from June 2020. It had restructured the Global Equities funds portfolio by consolidating three funds into a single trust with two unit classes. Profitability improved on the back of various cost control measures such as no bonus deferral for FY20. Cost-to-income ratio improved to 17.3% in FY20, down from 18.1% in pcp.
In the H1 FY21 update, MFG witnessed a 9% uptick in funds managed to $100.9 billion. Management and services fees improved by 8%. Overall revenues dropped owing to a decline in performance fees. Institutional clients showed resilience with an uptick in inflows, while retail inflows slowdown in H1 FY21. Its global listed infrastructure funds witnessed inflows of $2.1 billion. The company’s Magellan Sustainable Fund was made available to retail investors. The company launched principal investment initiatives with direct investments in companies – invested in Guzman y Gomez, a fast-food restaurant based out of Sydney. It had closed the period with a cash balance of $338.8 million as of December 2020
Outlook: MFG seeks to launch a retirement income fund and it is holding-up discussions with regulators. The company has partnered with Barclays for investment in Barrenjoey with an investment of $156 million. MFG is expecting funds management expenses for FY21 to be at the lower-end of the range of $110-$115 million.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs MFG (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month negative returns of ~25.99% and ~26.98%, respectively. It is currently trading below to the average of 52-week high price of $66.00 and 52-week low price of $30.10. The stock underperformed the market volatility index given the bond purchase program by the Reserve Bank of Australia and decision to pursue loose monetary policy. We have valued the stock using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight discount as compared to its peer average Price/Book Value (NTM Trading multiple) given the inherit risk in funds management business with respect to volatility in fund flows from institutional investors and returns are highly correlated to interest rate policy by the Reserve Bank of Australia. For this purpose, we have taken peers such as Perpetual Ltd. (ASX: PPT), Platinum Asset Management Ltd. (ASX: PTM), Pinnacle Investment Management Group Ltd. (ASX: PNI), to name a few. Considering the launch of principal investment business, growth plans for retirement fund, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $42.710, down by 0.675% on 8th March 2021.
(2) IOOF Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.07 Billion, Annual Dividend Yield: 7.21%)
Integration of Pensions & Investments Business Boosted Managed Funds: IOOF Holdings Limited (ASX: IFL) operates as a financial services company providing personal superannuation, allocated pension services, employee superannuation retirement services, and investment services. The pandemic affected its financial advice business with revenue de-grew by ~4% in FY20. The addition of the ANZ Wealth Management Pensions & Investments business (P&I) added $25 million after-tax profit in H2 FY20. Gross margin was affected by legislative changes in Early Access to Superannuation. Funds managed grew by 46% to $202.3 billion with P&I business alone contributed ~$77.1 billion. IFL experienced strong inflows in Shadforth Portfolio Service. The company’s net profit was supported by $4.8 million realized from the sale of non-core assets. Nevertheless, underlying profit declined by 34.9% to $128.8 million in FY20 owing to an increase in operating expenses and integration of P&I.
In H1 FY21, IFL posted a 43% increase in funds under management to reach $204.3 billion. The early pension release scheme saw withdrawals reaching $1.4 billion. Completion of P&I added $70.4 billion to the funds under management. The company witnessed net outflows of $4.1 billion on account of strategic initiatives. The company realized annualized synergies of $20 million from P&I positively impacted net profit. Strong contribution from Shadforth continues. IFL is consolidating its platform with about 11,241 clients is expected to migrate to Evolve platform in early 2021. It had reported an underlying net profit of $65.9 million in H1 FY21, an increase of 16.6% over pcp. It closed the period with a cash balance of $899.4million as of December 2020.
Outlook: Acquisition of MLC Australia to boost wealth management business. After absorbing MLC, IFL is expected to have 1,880 financial advisors representing nearly 2.2 million end customers. The company expects the acquisition to be completed by June 2021. Targeted leverage of 1.0-1.3x with estimated leverage of 1.1x post completion of MLC acquisition. IFL is expected to realize $65-$80 million annualized synergies from MLC.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs IFL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted negative 3-month and 6-month returns of ~13.29% and ~3.66%, respectively. It is currently trading below to the average of 52-week high price of $5.176 and 52-week low price of $2.505. The stock slightly underperformed the market volatility index citing general market conditions, policy rate environment, etc. We have valued the stock using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer median Price/Book Value (NTM Trading multiple) as the management is optimistic that integration of MLC Australia to add customer base by 2.2 million in the near-term and to realize synergies of $65-$80 million on an annual basis. For this purpose, we have taken peers such as Pacific Current Group Ltd. (ASX: PAC), Macquarie Group Ltd. (ASX: MQG), Navigator Global Investments Ltd. (ASX: NGI), to name a few. Considering the contribution from portfolio services business, synergies from the acquired business, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.260, up by 2.194% on 8th March 2021.
(3) HUB24 Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.33 Billion, Annual Dividend Yield: 0.41%)
Strong Net Inflows Aided by Platform Business: HUB24 Limited (ASX: HUB) operates as a financial services company. The company offers portfolio management, transaction, and reporting solutions for licensees, financial advisers, accountants, stockbrokers, and institutions. HUB posted a 37% increase in platform revenue resulting in 14% growth in FY20 group operating revenue to $110.2 million. It had witnessed a 34% surge in funds under administration to $17.2 billion in its platform business. The company experienced strong net inflows registering a 59% growth on an annualized basis in the past five years to FY20. Its platform margin, however, contracted due to higher transaction fees paid on account of market volatility. Its underlying net profit after tax declined to $10.1 million in FY20, as compared to $24.7 million in FY19, mainly due to impairment, restructured costs, and fair value changes together totalling $1.9 million and an increase in share-based compensation by $4.4 million.
HUB experienced strong revenues in its platform business with 25% growth in H1 FY21 over pcp. Underlying EBITDA in its platform business improved by 26% to $17.4 million. Net inflows surged to $3.1 billion in H1 FY21, up from $2.5 billion in pcp. Cut in RBA cash rate eroded cash margin income. Statutory net profit after tax declined by 62.8% to $6.1 million due to various one-off items and share-based payments.
Outlook: The acquisition of Xplore for $60 million to add a fund base of $16.6 billion. Completion is on-track for March 2021. HUB is targeting to achieve funds under administration of $43-$49 billion by FY22. The company is integrating transaction and reporting capabilities into its platform product.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs HUB (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~-6.42% and ~+17.54%, respectively. It is currently trading above to the average of 52-week high price of $27.80 and 52-week low price of $5.98. The stock underperformed the market volatility index on the concerns of softened bond yields and conservative policy stance. We have valued the stock using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average Price/Book Value (NTM Trading multiple) as its platform business proved resilient with positive net inflows and management is optimistic about growth potential for FY21. For this purpose, we have taken peers such as Pinnacle Investment Management Group Ltd. (ASX: PNI), Netwealth Group Ltd. (ASX: NWL), Perpetual Ltd. (ASX: PPT), to name a few. Considering the rapid revenue growth, benefits of acquisitions, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $20.100, up by 3.182% on 8th March 2021.
(4) Platinum Asset Management Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.71 Billion, Annual Dividend Yield: 4.97%)
Offshore Funds Provided Relief: Platinum Asset Management Limited (ASX: PTM) provides asset management, equities, bonds, investment strategies, financial planning, and advisory services to customers worldwide. PTM experienced a 43% dip in gross inflows and funds under management stood at $21.4 billion in FY20, down by 14% over pcp. Market sell-offs due to COVID-19 fears affected inflows. Its flagship products, PIF and PAF, witnessed net outflows, particularly by retail investors. PTM added two offshore funds and saw traction in client engagement in subsequent periods. The technology and healthcare sector posted a rally in the last quarter of FY20. Management fee revenues dropped by 6% in FY20 over pcp. It had garnered a performance fee of $9.1 million from Asia Ex-Japan portfolios. Expenses shot-up by 2%, owing to an increase in share-based compensation and occupancy related costs. The company reported a net profit after tax of $155.6 million in FY20, down by 1.7% over pcp.
PTM posted an 11% drop in funds under management to $22.2 billion in H1 FY21 over pcp. Management fees declined by 12%. It continued to receive performance fees from international portfolios. All of its funds posted a positive 1-year return except the Japan and European funds. It had seeded two new Cayman funds for the US market. Gross inflows improved by 37% with managed funds reaching to $23.6 billion in H1 FY21 over pcp. Inflows recovered during the second half of the calendar year. Institutional funds showed outflows due to portfolio rebalancing, although no mandates were lost. Its profit after tax improved by 18% to $90.4 million, supported by other income of $27.0 million due to market gains from seeded investments. It had a cash balance of $157.4 million as of December 2020.
Outlook: The company’s Asia-specific fund and international fund showed performance above respective benchmarks for 3, 6, and 12-months period ending January 2021. The company to continue to increase international equity exposure. Its offshore initiatives provide a platform for growth in the medium term.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs PTM (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~6.85% and ~37.24%, respectively. It is currently trading above to the average of 52-week high price of $5.040 and 52-week low price of $2.630. The stock performed well over the market volatility index. We have valued the stock using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer median Price/Book Value (NTM Trading multiple) given the management focus on launch of offshore funds. The company’s Asia-specific fund and international fund showed stellar performance for 3, 6, and 12-month period ending January 2021. For this purpose, we have taken peers such as Magellan Financial Group Ltd. (ASX: MFG), Selfwealth Ltd. (ASX: SWF), Pinnacle Investment Management Group Ltd. (ASX: PNI), to name a few. Considering the strong inflows during H1 FY21, high ROE vis-à-vis industry, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $4.680, up by 1.298% on 8th March 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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