Following recent volatility in equity markets and falling share prices for listed fund managers, Morningstar believes short-term downside risks may have been overemphasised by investors while the anticipated recovery remains underappreciated.
The research house said that the four fund managers it covers – Magellan, Pinnacle, Pendal and Platinum – are all now trading at substantial discounts.
“With such fertile hunting ground, we think the market is underestimating the key investment strategies of these asset managers, and their ability to deliver positive alpha and attract money,” said Morningstar equity analyst Shaun Ler.
“We think the outlook for asset managers is better than what’s currently being priced in. Recent market declines suggest future investment returns will likely improve.”
According to Morningstar’s analysis, the market is currently pricing in a 6 per cent annual decline in net profit after tax (NPAT) on average, for these fund managers, over the next five years.
This would mean that all four fund managers need to record below-index returns and experience ongoing outflows, which the research house has branded unlikely.
“Many key holdings of the biggest strategies of these four asset managers fell materially below Morningstar’s intrinsic assessment,” Mr Ler said.
“This means there is higher probability for these strategies to deliver above-market returns. If this happens as we would expect, it would likely help relative performance and assist with winning new money.”
Magellan was highlighted as Morningstar’s top pick, followed by Pinnacle, Pendal and Platinum.
Mr Ler suggested that the market was underestimating Magellan’s undervaluation and the potential for improved performance.
“Magellan’s efforts to promote its investment team helps assuage key person risks, while selling other better-performing strategies helps mitigate outflows,” he said.
“In CIO Hamish Douglass’ absence, Magellan Global remains in the capable hands of co-founder and ex-CIO Chris Mackay, long-time alumni Nikki Thomas, and head of Macro Arvid Streimann.”
Morningstar predicted that Magellan’s NPAT will fall by 9 per cent per year for the next three years to $315 million, down from $413 million in FY21, before recovering to $382 million over the two years to FY26.
Meanwhile, Magellan’s funds under management (FUM) are expected to fall to $99 billion by FY26, down from $114 billion in FY21.
“We expect FUM to be exclusively driven by market returns averaging 15 per cent per year, given the significantly undervalued starting point of the portfolios, and incorporate net outflows totalling $77 billion over the next five years to fiscal 2026,” said Mr Ler.
The recent fund manager sell-off overlooked some of the appealing traits of these businesses, according to Morningstar.
“For example, certain managers like Pendal have delivered extended outperformance, which help support future mandate wins,” Mr Ler noted.
“The compounding potential of fund managers with larger FUM like Magellan, Pinnacle and Pendal means there is support to earnings from investment returns notwithstanding periodic outflows. Capital management initiatives like share buybacks could also become a feature.”
Pinnacle is expected to grow affiliate FUM to $204 billion by FY26, up from $94 billion at the end of 2021.
The underlying NPAT of Pinnacle is expected to rise with an annual growth rate in the high teens, pushing above $170 million by FY26.
“We think the market is overlooking the earnings potential of Hyperion’s stocks, performance improvements in boutiques like Antipodes, and its growing asset class diversity,” said Mr Ler.
“We believe Pinnacle can continue gaining market share from competitors. Pinnacle affiliates are highly competitive, both in performance and fees.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
