Here's a novel way to beat the short sellers. Buy your own shares back off them. In truth beating the short sellers is probably not the main strategic rationale behind the decision of international equities manager Platinum Asset Management Limited (ASX: PTM) to buy back up to 10 per cent of its issued capital over the next 12 months.
The fund manager believes its stock is undervalued at recent levels and with around $242 million in cash sitting on its balance sheet as at June 30 2016 its common sense to buy back some stock when prices are low.
Today's 11 per cent share price jump to $5.42 may in part be related to some short sellers of the stock buying back shares on market in the belief that the bottom is now in. Given that the stock is still down around 33 per cent in 2016 it's likely that most of the short sellers are still in the money, although some may choose to bide their time yet, even after today's price surge.
Platinum has faced two big problems over the past year in that its global funds have been underperforming their benchmarks, which in turn has led to net funds under management (FUM) outflows. Fund managers charge fees on a normally fixed percentage of funds under management, so FUM falls via outflows or market depreciation tend to damage the top line in an effect that is exaggerated when the two combine together.
Platinum's bottom line has historically benefited from its low cost-to-income ratio, which is partly a result of the firm's deliberate decision to outsource much of its sales, distribution and operational functions. In fact its boss Kerr Neilson is on the record stating his belief that some fund managers focus too much on sales to the detriment of investment performance. In my opinion the best fund managers strike a healthy balance between strong investment and sales teams, with other core fixed costs such as fund accounting, settlements, custody, reconciliations, risk, compliance, human resources and legal kept to a minimum.
Competitive
The global asset management business for international equities mandates is ferociously competitive as it's the ultimate gravy train due to its eye-watering size and fee-earning potential for any successful players. Traditional passengers in Australia include Colonial First State as the asset management arm of the Commonwealth Bank of Australia (ASX: CBA), Henderson Group plc (ASX: HGG), BT Investment Management Ltd (ASX: BTT) and AMP Limited (ASX: AMP).
For Platinum investors the medium and longer-term outlook remains leveraged to its funds' investment performance and its consequent ability to attract inflows via effective business development. It has the track record to suggest it could rise again, but this is a turnaround story that will take a long time yet in my opinion.
For me a better diversified financial services business to consider for medium-term growth and dividends is annuities provider Challenger Ltd (ASX: CGF). It enjoys a strong competitive position, scalability, tailwinds and some powerful in-house marketing helping to win a lot of new business. If Challenger gets much cheaper I'll be jumping on board.
