Why has the Australian Ethical (ASX:AEF) share price tanked 17% in a week?

What spurred this market darling ethical fund to lose so much ground this past week?

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a woman wearing green and sitting in a green room with a green coffee cup puts her hand to her forehead in dismay while looking at papers sitting at her computer.

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Investors might not be used to the Australian Ethical Investment Limited (ASX: AEF) share price having a rough time. After all, this is an ASX 200 share that has given investors close to a 150% return year to date in 2021 alone. But the past week has not been kind to this market darling.

Australian Ethical shares have lost a nasty 17% since just last Tuesday's market close. That's including the 4.12% drop to $12.10 a share that we see just this Tuesday so far. So what's gone so wrong for Australian Ethical over the past week or so?

Well, the primary driver seemed to be the earnings guidance update the company released on 1 December. Australian Ethical reported a 9% increase in funds under management (FUM) against 30 June to $6.64 billion as of 31 October. It also informed investors that it is expecting underlying profit before tax to be between $5 million and $5.5 million for the half year ending 31 December. That's an 8% or so increase on its half year to 31 December 2020.

It seems investors were expecting a little more from the company. That's going off the fact that the Australian Ethical share price has lost just over 17% since this update was released. There have been no other major news or announcements out of the company since.

Digging into the Australian Ethical share price's week of woe

Another concern could be Australian Ethical's arguably lofty valuation. Even after the past week's falls, Australian Ethical shares, as of today, still trade on a price-to-earnings (P/E) ratio of 138.9.

Here's how an article in the Australian Financial Review (AFR) last week described this valuation:

The green mania has helped AEF's valuation rocket 1465 per cent over the past five years to $1.57 billion. In other words, it's a fund manager that trades on around 141 times profits.

To put that in context, if emerging markets were still an investment mania and Asia-focused [Platinum Asset Management Ltd (ASX: PTM)] traded on 141 times last year's profit of $163.3 million, shares would sell for $39.22 on a $23 billion valuation today. In reality, they closed at $2.65 on Wednesday [last week] on a market cap of $1.55 billion…

So we might have an answer for Australian Ethical's nasty week if we take all of this into account. Even so, investors perhaps can't complain too loudly with a year to date gain of nearly 150% still under the belt.

At it current share price, Australian Ethical has a market capitalisation of $1.37 billion. Its trailing dividend yield is sitting at 0.57%.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Australian Ethical Investment Ltd. The Motley Fool Australia has recommended Australian Ethical Investment Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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