This 8 per cent growth rate is predicated on Magellan keeping the investors who gave it $100 billion in funds under management (FUM). It should be able to do this with performance in line with past experience.
Analysts typically value fund management companies by using a discounted cash flow calculation going out three or four years. Typically, they use a terminal value of about 2 per cent.
But if Magellan is saying it will grow at 8 per cent (without including new initiatives designed to raise additional incremental funds under management such as its new retirement product), that means analysts are using the wrong discount rate by a factor of three.
Ian Macoun, chairman of Pinnacle, says the 30 per cent rise in Pinnacle’s share price this year is probably a reflection of investors factoring in the growth in funds under management, revenue and profitability. Macoun’s personal wealth has risen by about $40 million this year.
Pinnacle has invested in a range of fund managers. It calls these affiliates. It took a strategic decision to expand in credit-related fund management and this proved smart because that’s what investors want. It owns equity interests in Metrics and Coolabah Capital Investments.
The aggregate FUM of affiliates was $61.6 billion as of December 31. This has grown at a compound annual growth rate of 23.3 per cent per annum over the past 10 years. The figure is 21.2 per cent excluding $6.8 billion acquired in July 2018 and $3 billion acquired in December 2019 with the purchase of 30 per cent of Coolabah.
Macoun believes retail investors in Australia have been on an “investment strike” for the past two years, but they will come back as markets continue to rise through the year.
“This happens through every cycle,” he says. “Retail investors were put off by the fall in markets at the end of 2018 and there was the disruption caused by the Hayne inquiry.”
Another fund management company that has done well this profit reporting season is Janus Henderson, which is up 12.5 per cent. It has stemmed the outflows that occurred over the past two years and is upbeat about 2020.
If you extend the net more broadly to capture companies with significant fund management operations, this would include Challenger, up 25 per cent since January 1, and Macquarie Group, up 8 per cent.
Challenger’s Fidante Partners, which invests in a range of different fundies, has about $61 billion under management and is forecast by Macquarie analysts to earn a profit this financial year of $95 million, up 8 per cent on the previous year.
Macquarie has about $587 billion in funds under management. It is the world’s largest infrastructure fund manager.
The market demand for money managers is a reflection of the rising risk appetite in global markets. The coronavirus is an emerging threat to global GDP growth but the big-ticket issues that suppressed investor demand in 2019 are no longer weighing on the minds of investors.
The threats that have dissipated are the US-China trade wars, Brexit and the Hong Kong protests. Above all, there is an expectation here and overseas that central banks will not be raising interest rates for several years.
Fund management companies are often sold short by hedge funds trying to hedge themselves against a heavy fall or collapse in global markets. There is a sense at the moment that the hedging is not happening.
This has tended to lift the sharemarket fortunes of all fund managers, including those with net outflows. In essence, the buyers with strong risk appetites are prevailing while the short sellers stand back.
Disclosure: The author’s self-managed super fund owns shares in Pinnacle.