In its analysis of seven asset managers under its coverage, Morningstar deduced that while the near-term outlook for Australian asset managers remains favourable, extending possibly until fiscal year 2025, structural headwinds, including ongoing net outflows and competitive pressures, are expected to dampen long-term prospects.
Morningstar’s Industry Pulse Survey, which analysed seven asset managers – Challenger, GQG, Insignia, Magellan, Perpetual, Pinnacle, and Platinum – found that they may experience a temporary earnings boost potentially driven by lower interest rates but cautioned that these gains could be short-lived.
“Average earnings for the seven asset managers under our coverage – Challenger, GQG, Insignia, Magellan, Perpetual, Pinnacle, and Platinum – will likely improve over the near-term to fiscal 2025, but moderate thereafter. This is partly due to our expectations for continuing net outflows, on average,” Ler said.
“While potentially lower rates in fiscal 2025 could lead to a cyclical flow uplift, any benefits may be short-lived, as asset class rebalancing activity subsides.”
On competitive pressures, Ler explained that the asset managers are grappling with persistent peer-relative performance challenges, leading to continued market share losses to ETFs and industry superannuation funds.
Notably, Morningstar said the trend to low-cost exchange-traded funds is expected to continue.
“ETFs drew steady flows despite market volatility from 2022 to 2023, as investors sought diversification, lower fees, and easy access. Since mid-2022, a relatively larger allocation of funds to cash and fixed-interest ETFs, at the expense of equity and multi-asset ETFs, has reflected investor aversion to growth assets amid rising interest rates,” Ler said.
“This trend appears to reflect investor aversion to growth assets amid rising interest rates.”
Meanwhile, Ler predicted that Australia’s mega superannuation funds will continue to grow in scale, posing further challenges to traditional active managers.
Presently, the two largest industry funds comprise $335 billion and $280 billion, respectively, in assets under management, with these figures expected to surpass $500 billion over the next five years.
“Through default choice and mandatory contributions, industry funds are pressuring fees and can tap into a broad range of investment opportunities, including unlisted options – a byproduct of scale,” Ler said.
All of this indicates a shrinking pool of capital for active managers who have been experiencing net outflows since 2022, the analyst said.
“Many underperformed passive funds amid the market downturn. While some funds were recently reallocated to active managers, flows are sporadic and concentrated on select asset classes, primarily fixed interest.
“We think the competitive positions of active managers are weakening.”
Ler also noted a prevailing investor pessimism due to earnings challenges, suggesting undervaluation of Australian asset managers on average.
Stock performance in 2024 has varied, he said, with some firms seeing reratings on strong fund performance while others faced declines amid economic uncertainties.
“Share prices of ASX-listed asset managers have been mixed since the start of 2024. GQG Partners and Pinnacle rerated as their funds delivered a strong performance, followed by Challenger. Others experienced declines as the outlook for inflation and interest rates were less favourable than initially expected, alongside some organisational issues,” Ler said.
Ler identified Insignia and Perpetual as potential candidates for upside due to expected flow improvements and potential cost-cutting initiatives. Conversely, he suggested caution regarding GQG’s valuation, indicating possible overoptimism in current market expectations.
