Event Core
The managed funds industry has gone leaps and bounds in June 2021 quarter, clocking $4,309.8 billion funds under management surging by 5.1% QoQ. Subsequently, consolidated total managed funds institutions increased $3,437.9 billion, a jump of 4.7% QoQ. In addition, a 5.6% QoQ uptick in superannuation (pension) funds turned to be a significant contributing factor in driving funds under management of unconsolidated assets total managed funds institutions.
Figure 1: Movement in Asset Allocation:
Source: Based on The Australian Bureau of Statistics Data, Analysis by Kalkine Group
Spike in Superannuation Fund
The rise in Superannuation Fund Assets: Total unconsolidated assets of superannuation funds struck $3,353.4 billion, up by 5.6% QoQ. An uptick of units primarily drove the spike in trusts of 6.5% (+$77.3 billion), overseas assets of 8.1% (+$48.8 billion), shares of 8.2% (+$42.6 billion), partially offset by an 18.2% decline in short-term securities (-$10.9 billion).
Net Capital Outflows Inclined: In March 2021 quarter, Australia’s net capital outflows increased as the current account surplus widened. The net outflow was significantly reflected in portfolio equity investments in foreign equity holdings of superannuation and other investment funds.
Award Wage Increase: In June 2021, the Fair Work Commission (FWC) dictated a 2.5% incline in the National Minimum Wage, including all award wages. Subsequently, superannuation guarantee inclined to 10% from 9.5% of ordinary time earnings as of 1 July 2021.
Figure 1: Post-COVID Measures by Government Upheld Superannuation Funds at Elevated Levels:
Source: Based on The Australian Bureau of Statistics Data, Analysis by Kalkine Group
Growth Posted in Public Offer (Retail) Unit Trusts
Assets Surged for Public Offer (retail) Trusts: In June 2021 quarter, the total unconsolidated assets of public offer (retail) trusts inclined by 4.2% and registered $461.5 billion in value. The surge was primarily driven by an uptick in overseas assets of 11.5% (+$8.8 billion), land, buildings, and equipment of 3.7% (+$5.4 billion), and a $3.0 billion (+3.2%) rise in units in trusts. Further, cross investments within the public offer (retail) unit trusts jumped by 2.0% and stood at $38.9 billion.
Performance of Other Managed Funds Institutions: In line with the high performance of equity markets, total unconsolidated assets of friendly societies inclined by 6.0% QoQ and reached $8.7 billion. Similarly, unconsolidated assets in common funds inclined by 2.9% QoQ and clocked $11.1 billion. On the other hand, low cash investments led to a 6.4% decline in cash management trusts and touched $31.3 billion.
Marginal Impact on Life Insurance
Movements in Life Insurance Assets: In June 2021 quarter, total unconsolidated assets in life insurance space marginally surged by 0.6% and stood at $127.4 billion. Fundamental movements were affected by the favourable impact on bonds (+3.6%), overseas assets (4.7%) and other non-financial assets (48.9%), offset by shares (-10.2%) and deposits (13.8%).
Life Insurance Industry Top-line Performance (Year-Ended June 2021): Amid favourable government support and altered market estimates, total revenue inclined by 36.2% YoY and stood at $21.7 billion primarily driven by investment revenue inclining to $6.3 billion relative to -$0.9 billion previous year, partially offset by 2.1% decline in net policy revenue.
Lending Activities in the Banking Industry
Asset Build-up in Banking Space: In July 2021, the value of new commitment loans inclined by 0.2% MoM for housing, by 14.2% MoM for personal fixed-term loans, and 56.0% MoM for business construction. On a YoY basis, housing loans inclined by 68.2% PcP, primarily attributed to 58.3% PcP incline for owner-occupier and 98.7% for the investor. Business loans surged, primarily driven by a 28.1% increase in construction loans and 136.3% incline in a property purchase.
Home Loan Financing Activities: In July 2021, total housing loans declined by 0.4% MoM, resulting from a 4.7% consecutive decline in the construction of new dwellings. The new dwelling construction fell by 41.9% from the all-time high touched in February 2021. The strength has diluted due to the unwinding of the HomeBuilder grant, which ended in April 2021.
Key Risks and Challenges
Although managed funds have diversified into offshore assets, the global pandemic has not yet ceased, and therefore, systematic risks are dominant. Recent toppling in the insurance industry due to the business interruption insurance claim policy, investment income decline and AFCA's claim relief for policyholders may delay segment recovery. The unwinding of the HomeBuilder Grant resulted in consecutive sequential declines in home loan financing activities. Financial operations in a low-interest-rate environment may present repricing risk to the insurance industry subjected to the increased discounted value of insurers' future liabilities. Business loans may be affected by the retrenchment of relief policies introduced by the government in pandemic times.
Figure 3: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
Australian economy surged by 0.7% for Q4 FY21(QoQ) with a 7.0% incline in trade, which may push business activities. The Reserve Bank Board (RBA) reduced the cash rate to 0.1% on 3 November 2020, which boosted cash flows for businesses and lending activities. On 6 July 2021, RBA announced its continued interest in purchases of government bonds amidst the completion of $100 billion of bond purchases in September 2021, which may lower the interest rate structure. The RBA has put a comprehensive set of monetary policies to support the supply of credit and lower funding costs. Resilient wage growth has delivered a significant contribution to superannuation funds which signals a recurring incremental trend. Considering a spike in the managed funds, we have figured out four stocks on ASX that are set to see the momentum.
(1) MFG (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 8.06 billion, Annual Dividend Yield: 4.84%)
Outperforming Funds Building Top-Line Performance: Magellan Financial Group Limited (ASX: MFG) is a specialist fund manager that offers investment opportunities to high networth and retail investors in ANZ region and institutional investors globally. For FY21, average funds under management inclined by 9% and reached $103.7billion with management and services fee revenue up by 7%, clocking $635.4 million. For the year ended, MFG booked $265.2 million in NPAT, down by 33% due to significant rise in transaction costs pertaining to strategic initiatives, and lower performance fees.
For better fund flexibility, MFG has recently established a Dividend Reinvestment Plan (DRP) to enable shareholders to reinvest all or portion of their dividends. Over the past 14 years, MGF has consistently achieved its investment objective of providing a return of over 9% per annum (for retail investors). As of 30 June 2021, MFG’s investment assets stood at $902.9 million, up from $836 million as at 30 June 2020.
Outlook: MFG’s objective is to touch a minimum average return of 9% per annum net of sees over the medium to long term period. For FY22, the company expects funds management business expenses to range $125-130 million.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
MFG Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of MFG went down by ~13.098%. The stock made a 52-weeks' low and high of $42.010 and $64.440, respectively. The stock has been valued using the Price/Book value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at some premium compared to its peer's average, considering the improved fund performance in FY21. For the purpose of valuation, peers like EQT Holdings Ltd (ASX: EQT), Platinum Asset Management Ltd (ASX: PTM), Mainstream Group Holdings Ltd (ASX: MAI), have been considered. Considering the strong fund performance, liquidity position, and valuation, we give a 'Buy' rating on the stock at the current market price of $43.040, as of 6 September 2021, at 11:52 AM (GMT+10), Sydney, Eastern Australia. The stock had generated an annualized dividend yield of 4.84%.
(2) AMP Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$3.65 billion, Annual Dividend Yield: 0.00%)
Refining the Operations with Divestitures: AMP Limited (ASX: AMP) is a wealth management firm with a portfolio of businesses providing superannuation & financial advice, pensions, banking, and investment products in ANZ region. In FY20, AMP reported NPAT of $295 million, down by 33% PcP, primarily attributed to 44% decline in Australian wealth management and 32% decline in AMP Capital. Mortgage book stood resilient at $20.2 billion amidst increased competition.
In H1FY21, AMP reported an increase in the underlying NPAT to $181 million, uptick by 57% PcP, primarily attributed to investment income from the group office and robust earnings from the AMP Bank. Total assets under management and administration inclined by $1 billion and booked $256 billion as of 30 June 2021.AMP recorded a decrease in the net cash outflows of Australian wealth management business to $2.7 billion. The underlying ROE has surged to 8.3% in H1FY21 relative to 6.0% in H1FY20. Further, AMP’s total loan book surged by 1.9% PcP to $21 billion. AMP has registered $452 million of surplus capital, way above target requirements.
Outlook: AMP prioritises demerging the AMP Capital Private Markets business by the end of H1FY22. The company is progressing well to deliver $300 million of yearly run-rate of cost savings by FY22. In line with a binding contract with Macquarie Asset Management, AMP will divest the Global Equities and Fixed Income (GEFI) business for a maximum of $185 million.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
AMP Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of AMP went up by ~3.756%. The stock made a 52-weeks' low and high of $1.037 and $1.770, respectively. 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 (in percentage terms). The stock of the company can trade at some discount compared to its peer's average, considering extensive concentration on divestiture activities. For the purpose of valuation, peers like Bendigo and Adelaide Bank Ltd (ASX: BEN), Challenger Ltd (ASX: CGF), Humm Group Ltd (ASX: HUM), have been considered. Considering the prudent liquidity position, bottom-line growth, valuation and key risks associated with the business, we give a 'Speculative Buy' rating on the stock at the current market price of $1.100, as of 6 September 2021, at 11:53 AM (GMT+10), Sydney, Eastern Australia.
(3) Platinum Asset Management Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.25 billion, Annual Dividend Yield: 6.40%)
Significant Developments in Operating Performance: Platinum Asset Management Limited (ASX: PTM) is engaged in asset management, financial planning, and financial advisory services. For FY21, total revenue and other income inclined by 5.9% amid 10% increase in Funds Under Management, clocking $23.5billion, primarily driven by investment performance of $5.5 billion. PTM earned performance fee revenue of $4.0 million relative to $9.1 million in FY20. Absolute investment performance towards to value of PTM’s seed investments touched $43.9 million relative to $8.7 million in FY21.
In FY21, PBT inclined by 6.1% and touched $234.2 million. The significant gains of PTM’s seed investments were partially offset by decline in performance and management income. PTM launched the fixed cash distribution option to enable investors to elect on either receiving fixed annual cash distribution yield (currently at 4%).
Outlook: The ongoing process of vaccination drill is expected to place the economy in expansion territory and hence better investment opportunities. Future outlook for equity markets remains bullish, which shall imply high investment funds.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
PMT Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of PTM went down by ~10.072%. The stock made a 52-weeks' low and high of $3.020 and $5.140, respectively. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at some premium compared to its peer's average, considering high fund diversification attribute. For the purpose of valuation, peers like EQT Holdings Ltd (ASX: EQT), ASX Ltd (ASX: ASX), Magellan Financial Group Ltd (ASX: MFG), have been considered. Considering the prudent liquidity levels, resilience showcased by funds’ performance, and valuation, we give a 'Buy' rating on the stock at the current market price of $3.750, as of 6 September 2021, down by ~2.344%. The stock had generated an annualized dividend yield of 6.40%.
(4) Australia and New Zealand Banking Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 79.34 billion, Annual Dividend Yield: 3.73%)
Strong Housing Market and Resilience in Economic Activities Drives Financial Performance: Australia and New Zealand Banking Group Limited (ASX: ANZ) offers a range of banking and financial products and services. During FY20, ANZ reported a 6.2% cash return on equity with cash profits amounting to $3.76 billion. The bank stood resilient with desired liquidity position, as indicated by 11.3% common equity tier 1 capital. Funds and facilities in sustainable solutions have marked $9.08 billion since 2019. Net tangible assets per share formulated to $20.04/share with cash earnings per share of 132.7cents/share.
For H1FY21, ANZ’s common equity tier 1 ratio inclined to 12.4% and cash return on equity inclined to 9.7%. Credit conditions remained favourable with release of net credit provision amounting to $491 million, which incorporates collective provision of $678 million with individually assessed provision charge of $187 million. The collective provision balance has remained higher than $900 million, way above pre-COVID levels at $4,285 million.
Outlook: With favourable assistance of RBA in booking lending activities, ANZ may seek higher asset performance in the financial year. ANZ grew its targeted segment of housing owner occupiers and added more than 92,000 of new home loan accounts.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
ANZ Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of ANZ went down by ~1.368%. The stock made a 52-weeks' low and high of $16.400 and $29.640, respectively. 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 (in percentage terms). The company can trade at a slight premium compared to its peer's average, considering resilient reserve positions. For this purpose, we have taken peers like Bank of Queensland Ltd (ASX: BOQ), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), to name a few. Considering the performance in home loans segment, RBA support, and valuation, we give a 'Hold' rating on the stock at the current market price of $28.110, up by 0.861% as of 06 September 2021. The stock had generated an annualized dividend yield of 3.73%.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
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