The superannuation industry is expected to grow to $3 trillion in assets by 2020, up from $1.6 trillion as at 30 June 2013. There are two drivers for this.
- Compulsory employer contributions were only introduced in 1992, around 23 years ago. But most people work for more than 40 years of their lives and so potentially there are people who received no contributions for the first 17 years of their working lives. If the working population remains constant, then total funds will grow as more people receive the benefit for their full working lives.
- Mandatory percentage employer contributions have risen from 3% when the scheme started in 1992, to 9.5%, and will eventually reach 12%.
The fortunes of fund managers and advisors will improve as a result of this massive flow of funds. These businesses have two primary revenue sources, management fees and performance fees. With more money needing to be put to work, management fees will grow since they are usually charged on a percentage basis.
Here are three of the best large fund managers listed on the ASX.
Perpetual Limited (ASX: PPT)
Perpetual dates back to 1886 and there are three major areas to its business, Perpetual Investments, Perpetual Private and Corporate Trust. It recently acquired the Trust Company helping it to cement its dominant position in corporate trust and private advisory work. It has gone through a restructuring program over the past couple of years to reduce costs and improve profitability and is looking to launch a global fund to capitalise on Australian investors seeking international exposure. The company has a market capitalisation of around $2.7 billion, around $200 million in cash and by my estimates should generate around $120 million in free cash flow this year.
IOOF Holdings Limited (ASX: IFL)
IOOF is even older than Perpetual and dates back to 1846. It offers a broad range of financial services including advisory, platform and administration, estate planning, trustee services and wealth management. In August 2014, it acquired SFG and is now the third largest financial planner in Australia behind AMP and Commonwealth Bank. IOOF has a market capitalisation of $3.1 billion and should generate free cash flows of $140 million this year.
Platinum Asset Management Limited (ASX: PTM)
Platinum is slightly different from IOOF and Perpetual in that it was founded more recently by current managing director Kerr Neilson in 1994 and specialises in international equities. Its flagship fund, the Platinum International Fund has appreciated 13% per year since 1995 compared to 5.6% for its benchmark, the MSCI index. Platinum has a market capitalisation of $4.7 billion, has $24 million in cash and should generate free cash in the region of $180 million this year.
Foolish takeaway
Financial services companies operate in a cyclical industry that is exposed to financial markets and so before making an investment decision, it is important to gauge how they perform during bad times. On the other hand, they are highly cash generative businesses, capable of rapid growth and are able to pay out a high proportion of profits as dividends.
All three of these companies pay healthy fully franked dividends of more than 3.5% and are set to benefit from the long-term rising demand for financial services. However, I think they are all fully valued at current prices but are worth keeping an eye on in case the market offers a better price in the future.
