Monday 4th April 2022
Why Morningstar is doubling-down on Aussie fundies
The “widow-maker” in the Australian investment context has long referred to those willing or stupid enough to take a short position on the “big four” banks. Being such a huge part of the benchmark and with clear government support, betting against the sector has carried too much career risk for many. But in 2021 and 2022, this widow-maker may well have shifted to the Australian funds management sector.
Despite a buoyant market for equities of all kinds, barring China, with benchmarks up double-digits over the last two years, there is clearly a recession in active managers. Shaun Ler, an equity analyst at Morningstar, says “a downturn in equity markets has seen a range of Australian asset managers and financial services companies fall into undervalued territory.”
The thesis is outlined in a detailed paper on the funds management industry, which according to analysis shows both Magellan, Platinum, Pendal and even multi-affiliate Pinnacle, all trading at or near 12-month lows. Ler believes the market is “underestimating the key investment strategies of these asset managers and their ability to deliver index-beating returns.”
Such is life for an active manager, with momentum and short-term-earnings-driven investors tending to extrapolate short-term results into the future. Speaking for Morningstar, Ler says “we think the outlook for asset managers is better than what’s currently being priced in,” with a key part of the thesis being Morningstar’s bullish view on global equity markets in general.
He highlights Pinnacle’s incredible post-COVID run-up, but subsequent 33 per cent fall, as evidence of the market all but abandoning the sector despite the company showing positive momentum in its investment flows.
Explaining Morningstar’s thesis, he says that the market is “pricing an average net-profit-after-tax decline of 6% per year for these firms over the next five years.” This would require below-index returns to continue along with growing outflows, an outcome described as “unlikely.” Looking more closely at the underlying holdings within the Magellan global equity fund, in particular, Morningstar gains confidence from the fact that many of the largest holdings remain undervalued on their own internal measures, and therefore could be expected to rebound.
The group is most positive on Magellan, despite expecting its profit to fall by at least 9 per cent a year, with Pinnacle next in line supported by strong demand for the likes of its managers Coolabah Capital and Hyperion, which is experiencing its own period of torrid performance. Pendal is next with “recent outperformance to support future mandate wins and flows of new money.” However, there is less confidence in the contrarian positions taken by Platinum and the likelihood that returns will remain “patchy.”
Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.
