ASX code: PTM
Share price: $5.20
Industry: Funds Management
Forecast FY2017 Distribution: 30c
Australian fund managers have been feeling the heat as of late. Fund outflows, the resurgence of passive index funds and growth of ETF’s have been significant headwinds for the sector. Platinum Asset Management has been at the mercy of these thematics and the current most profitable funds management business in the country looks in danger of losing its crown to Magellan Financial Group. We believe that whilst passive funds and ETF’s have a significant part to play in the future of markets, current fears have been blown out of proportion and are more than reflected in the share price.
Platinum Asset Management earns its revenue through a combination of management and performance fees on funds it manages for its clients. Whilst total FUM has fallen by over 10% in the past year, PTM still has over $23b under management. PTM is promisingly still the most profitable manager in country, with revenues of 1.3c per dollar of FUM over the past financial year. Another auspicious feature of Platinum’s business is the significant over-representation of retail money in its funds. Retail, when compared to institutional, is often much slower to build as it relies on a solid long-term performance, targeted marketing and working with individual clients to tailor offerings to their needs. The positive aspect of this for Platinum is this usually provides a much stickier source of FUM. Institutional funds are often awarded on strict mandates and even slight misses on these targets can see a significant amount of outflows in short periods of time. This can protect the business from seeing significant swings in FUM from year to year as well as making forced liquidations of illiquid assets less likely.
After a notable 35% correction in its share price this calendar year, management recently announced the initiation of a buyback of up to 10% of the company’s shares over the next 12 months. Management have reserved total discretion over the price paid, with the only hint being that they will only be bought when they are trading at a ‘significant discount’ to their underlying value. On our valuation metrics, management have approximately a 10% window in share price for this to be valuable to shareholders.
Relative to other companies explored in previous Dividend Detectives, Platinum certainly rates further up the risk scale. With its business highly leveraged to global equity markets, it will tend to outperform market indexes during a bull market and underperform during a bear market. Whilst the risks are higher when investing in such a business, we believe this is partially mitigated by the fact that Platinum has a highly experienced management team who are aligned to the business, as well as outperformance of the market over longer time frames.
Fund managers live and die on their performance, so it is not overly surprising to see the significant fund outflows that Platinum experienced over the last 12 months as its performance slipped. If an investor can time the turnaround from fund outflows to fund inflows, there will be solid gains to be made. Whilst short dated performance numbers are not the best indicator for this, it is somewhat promising to note that a number of their funds returned to outperforming their benchmarks.
At $5.20, Platinum Asset Management is trading at a discount to our 2017 valuation of $5.63 whilst offering an attractive 5.8% yield and would be recommended for income investors willing to move a little higher up the risk scale as well as seeking some capital gains.
Gareth Abernethy is an analyst at Clime Asset Management.
Originally published in The Australian Tuesday 20th September 2016.