Asset & Wealth Management Sector – Riding on the Back of Growing Investment Needs

I. Sector Landscape and Outlook

The Asset and Wealth Management sector in Australia has undergone a significant transition after the introduction of superannuation and financial services reforms. While Asset Management focuses on a client’s investments in stocks, bonds, mutual funds, etc., Wealth Management looks at the overall financial position and provides advice in relation to tax planning, insurance, retirement planning, etc. Australia has one of the most mature markets in APAC region, with the largest domestic AuM and strong infrastructure to grow rapidly in the coming years. High equity yields as compared to other regions and local bond yields signal decent medium-to-long term growth prospects in Australia.

With the increase in ageing population, low interest rates and expected stability in stock markets, the provision of asset and wealth management services will be an essential component of customer-focused financial services. As the technological landscape continues to evolve, operations across these companies are expected to become highly streamlined with digital innovations embedded in the process. As a result, shareholders are expected to derive attractive returns from such businesses.

Managed Funds Highlights: In June 2020 quarter, Managed funds under management increased by 2.8% to $3,816.93 billion on the March 2020 quarter. Consolidated assets of managed funds institutions increased by 2.7% to $3,046.28 billion.

Figure 1. Managed Funds by Category in June 2020 Quarter

Data Source: Australian Bureau of Statistics; Chart Created By: Kalkine Group

Increase in Capital Raisings: In the June 2020 quarter, $31 billion was raised as secondary capital, representing the largest quarter after December 2009 quarter. ASX on-market traded value also increased on the back of market volatility due to COVID-19 and increase in on-market share.

Figure 2. Capital Raising and Cash Market Trading (Financial Year Ending 30^th June)

Data Source: ASX Limited; Chart Created By: Kalkine Group

Digital Transformation: Customers in the asset and wealth management sector have become increasingly tech savvy and look for mobile and omni-channel digital service delivery. A growing appetite for responsive websites and apps for better user experience is driving innovation in the sector. Therefore, a platform that delivers well-timed content and real, up-to-date, and accurate information is needed to build stronger relationships with customers.

Mutual Fund Growth: A growing middle-class population will lead to more savings for retirement and wealth accumulation, which will eventually lead to growth in mutual funds.

Demand for Lower-fee Products: Due to stringent transparency requirements from regulators and demand for low-fee based products from clients, new low fee products like Smart Beta will enter the market. Henceforth, fee generated by asset and wealth managers is expected to decline. In such a scenario, organisations may need to build an effective operating structure to tackle the decline in fee income.

Figure 3. Handling the Declining Fee Income

Source: Kalkine Group

Aggregation Services: These services fill the gap between traditional and modern wealth management platforms by meeting the needs of customers in a holistic manner. They allow for comprehensive expense management by aggregating customer accounts from many sources.

Key Risks/Challenges

Figure 4. Risks for the Asset and Wealth Management Sector

Source: Kalkine Group

Liquidity Risk: Increased redemptions, reduced investor applications, currency loss, etc., have posed liquidity challenges for businesses in the Asset & Wealth Management sector. The current conditions require businesses to monitor their cashflow assumptions and test their liquidity.

Regulatory Risk: ASIC’s legal and regulatory requirements remain unchanged in the absence of specific relief, which may pose challenges in the form of liquidity management, valuations, unit pricing, suspending redemptions, complaints handling and financial advice. For instance, companies need to have sufficient financial resources to comply with license requirements.

Counterparty Risk: Current economic conditions have made imperative for businesses to ascertain the financial and operational risks of counterparties to achieve good outcomes. Careful risk assessment is necessary considering complex contractual arrangements by counterparties.

Investor Services Risk: Clear, transparent, and effective communication with investors is desired to maintain a competitive stand in the industry. Volatile markets due to COVID-19 have led to skepticism among investors which calls for a well devised communication plan.  

Fraud & Cyber Security Risk: Threats to confidential and private information are at peak due to remote working. There has been a sharp increase in cyber-attacks which requires regular assessment of cyber security, fraud prevention and business continuity capabilities.

Outlook

A growing demand for innovation across the retirement, wrap and investment spaces, along with the threat of disruption is compelling wealth and asset management providers to look beyond regulatory compliance. The emergence of digital payments, cryptocurrencies, blockchain, and the desire for personalization are driving change in the industry. Notwithstanding the above trends, income in the Asset and Wealth management industries is asset and performance based, which places it at risk amid any potential market downturn due to COVID-19. Difficulty in making revenues coupled with significant cost disruptions may put these businesses in a challenging economic situation.

II. Investment theme and stocks under discussion (AMP, PTM, JHG, and PDL)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘P/BV’ method.

1. ASX: AMP (AMP Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$ 4.82 Billion)

AMP Limited (ASX: AMP) is a provider of wealth-management solutions in Australia and New Zealand. The Group has AMP Australia, AMP Capital, and New Zealand (NZ) Wealth Management (WM) under its umbrella along with a few strategic partnerships held by its business units in different companies.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~35% on 15 October 2020 closing price. For the said purposes, we have taken peers such as Challenger Ltd (ASX: CGF), Pendal Group Ltd (ASX: PDL), Platinum Asset Management Ltd (ASX: PTM), etc.

2. ASX: PTM (Platinum Asset Management Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$ 1.89 Billion)

Platinum Asset Management Limited (ASX: PTM) specialises in the fund management of global equities.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~43% on 15 October 2020 closing price. For the said purposes, we have taken peers such as AMP Ltd (ASX: AMP), Pendal Group Ltd (ASX: PDL), Janus Henderson Group PLC (ASX: JHG), etc. At the same price, the stock of PTM was offering a dividend yield of ~7.43%.

3. ASX: JHG (Janus Henderson Group PLC)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$ 8.62 Billion)

Janus Henderson Group PLC (ASX: JHG) is an asset management firm providing investment solutions through equities, fixed income, quantitative equities, multi asset and alternative asset class strategies.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~11% on 15 October 2020 closing price. For the said purposes, we have taken peers such as Pendal Group Ltd (ASX: PDL), Challenger Ltd (ASX: CGF), AMP Ltd (ASX: AMP), etc. At the same price, the stock of JHG was offering a dividend yield of ~5.35%.

4. ASX: PDL (Pendal Group Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$ 2.02 Billion)

Pendal Group Limited (ASX: PDL) is an investment management company providing services to institutional and individual clients. It manages portfolio across equity, fixed income, multi-assets, and balanced mutual funds.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~21% on 15 October 2020 closing price. For the said purposes, we have taken peers such as Janus Henderson Group PLC (ASX: JHG), Platinum Asset Management Ltd (ASX: PTM), AMP Ltd (ASX: AMP), etc. At the same price, the stock of PDL was offering a dividend yield of ~6.38%.

Note: All the recommendations and the calculations are based on the closing price of 15 October 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.