Across the Australian equity component of client accounts, we have bought Pendal Group Limited (ASX: PDL formerly BT Investment Management Limited), an Australian based fund management business with approximately $100B under management across various strategies. Pendal Group operates under two brands; Pendal in Australia and JO Hambro Capital Management (JOHCM) internationally. Pendal is a well-managed business, with a strong balance sheet and a clear growth strategy.
We are positive on the medium-term outlook for Pendal Group for the following reasons:
- Excellent track record of developing new products and extension strategies with good new FUM inflows;
- Capital-light nature of the business means they can grow sustainably and maintain an extremely high dividend payout;
- Longer term increase in asset values underwrites growth in FUM and revenues;
- Demonstrated ability to attract, retain and reward investment and distribution talent;
- Disciplined capacity management to preserve investment performance and management fee income;
- A strong balance sheet and solid cash generation means the group is well placed to provide seed capital for the launch of new products and strategies which will help drive future growth; and
- Excellent diversification across asset class and geography. High fixed costs do provide a barrier to deter new entrants.
As with all funds management companies’, business risks include the loss of key investment staff and sustained market weakness which both impact the level of funds under management (FUM) and hence revenue. Furthermore, revenues would be negatively impacted by a material deterioration in investment returns leading to lower performance fees as a source of revenue.
The purchase was funded from the sale of Janus Henderson (JHG), also a funds management business. Since initially including JHG in portfolios the company has seen significant management changes, primarily the loss of ex-Henderson staff, which raises concern around cultural integration and the potential loss of legacy Henderson fund managers especially in light of recent changes to remuneration structures.
There has also been a deterioration in performance across some of its largest offerings in Europe and the quantitative Intech franchise resulting in ongoing net outflows with no near-term catalyst evident to turn around the decline in FUM. Given these risks, the undemanding trading multiple seems justified notwithstanding the potential for further upgrades to synergy targets.
If you have any queries, please contact SB Wealth
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EP Financial Services Pty Ltd
ABN 52 130 772 495 AFSL 325 252 (“ELSTON”)
GPO Box 2220
Brisbane Q 4001