Two of Australia's most famous equities managers in Platinum Asset Management Limited (ASX: PTM) and Perpetual Limited (ASX: PPT) have delivered poor returns to investors over the last 10 years, but for different reasons.
Before we consider what may be behind the poor performance, let's take a look at how scrip in the two has performed over the past decade.
Shareholders might want to look away now, with Perpetual down 37% and Platinum down 36% over the period.
Source: Google Finance: Platinum and Perpetual share price performance over past 10 years.
As can be seen from how the two charts track each other with a reasonable alignment the performance of fund managers is closely correlated to the overall strength of the global equity markets in which they invest.
This is because all fund managers charge fees as a fixed percentage of the total funds that they have under management. As share markets rise and fall with the economic cycles so therefore does the amount of revenue they can earn irrespective of other factors like investment performance or net fund flows.
However, there are some key differences that have affected the performance of these two fund managers, although the symptom of their problems (fund outflows) has been the same.
Thanks to the tailwinds supporting them, good fund managers should be able to deliver steady net fund inflows over the medium term, while net fund outflows spell bad news and likely some sort of underlying or structural problems that should set alarm bells ringing for investors.
Let's take a look at what should be alarming investors over these two businesses.
Platinum Asset Management – has suffered similar structural problems to much of the hedge fund industry since the GFC as the effects of quantative easing, helicopter money, and virtual zero interest rate policy (ZIRP) across Asian and other global equity markets combine to predictably prop up asset prices and equity markets. The subsequent lack of volatility (and downside) has combined to bring into question the expensive fee structures of hedge funds and active managers like Platinum that generally outperform in bear markets, or those markets not artificially primed by central bank money pumping.
Platinum is known for its investment expertise, but it also generally likes to outsource its retail distribution and institutional business development capabilities which is unusual for a fund manager of its size and the effects of this decision may now also be taking their toll on the business.
Platinum's funds have also generally underperformed over the last five years thanks partly to the issues outlined above. This has made its higher fee structure harder to justify to its clients and funds have flowed out with the share price tanking. Platinum then may need to adjust to the structural change in the dynamics of equity markets and investor expectations to reverse its fortunes.
Perpetual – today announced that as at 31 December 2016 its total funds under management (FUM) was $30.9 billion. I took the opportunity to check what its FUM was 10 years ago on December 31 2006 and discovered it was $36.8 billion.
Investors can see how Perpetual's total FUM over the period has actually dropped $5.9 billion or around 16% and anyone who knows anything about the tailwinds supporting the buy side funds management industry over the last 10 years would know that this result is pathetic. It should also explain everything you need to know about the performance of Perpetual's share price.
Any moderately well run fund manager should be able to grow inflows and FUM over the medium term, with Perpetual's embarrassing results demonstrating a lot about its underlying quality as an investment prospect.
So what fund managers should you own?
Unfortunately, both of the above remain stocks to avoid, especially when investors could buy fund mangers consistently showing how its done.
Magellan Financial Group Ltd (ASX: MFG) is a global equities manager actually benefiting from many of the macro themes that have been hurting Platinum. While others like Henderson Group plc (ASX: HGG) or BT Investment Management Ltd (ASX: BTT) look far superior businesses to Perpetual in terms of gaining funds under management.
Investors looking for another quality founder-led company that offers a higher risk / return ratio could also consider small-cap Wilson Asset Management Limited (ASX: WAM).
