In its Australian Asset Manager report for Q2 2024–25, the research house said Challenger, GQG and Perpetual offer the greatest value out of its covered firms – a pool that also includes Insignia, Magellan, Pinnacle and Platinum.
“We think the market underestimates several of their merits,” equity analyst Shaun Ler said.
“For Perpetual, these include the potential value from cost reductions and likely flow improvements. For Challenger, we see strong demand for its products and likely gross margin expansion.
“For GQG, these are its strong long-term track record, below-peer average fees, widespread presence on recommended product lists, and good team stability.”
Platinum, on the other hand, was the weakest performer, with Ler highlighting subpar returns, sluggish growth and an aborted acquisition by Regal Partners as having influenced Morningstar’s evaluation.
Elaborating on Morningstar’s confidence in each of the three fund managers it selected as the most valuable, Ler said Perpetual, which has seen a significant drop in its share price over the past year, is not enjoying the market’s confidence despite a number of positives.
“We believe the market is pricing in an excessive deterioration in Perpetual’s future cash flow generation, seemingly underappreciating the merits of its diversified business,” Ler said.
He opined that Perpetual has room to centralise operations and eliminate duplication from the Pendal acquisition, while its corporate trust and wealth management units face less competition and offer more predictable earnings, balancing out potential volatility in asset management.
“The combination of improved flows, cost reductions and Perpetual’s inherently capital light business model should also allow for gradual deleveraging without the need for external financing,” Ler said.
His confidence in Challenger stems from the belief that the firm’s earnings per share can sustain mid to high single-digit growth, driven by rising annuity sales, increasing demand from an ageing population and strategic partnerships with superannuation funds.
Moreover, Ler said lower maturity rates enhance the compounding of Challenger’s investment assets, which supports higher yields and earnings.
Regarding GQG, the analyst is confident that weak near-term performance won’t sabotage the fund manager’s long-term track record.
“Past underperformance was short-lived as chief investment officer Rajiv Jain tends to make swift portfolio changes, meaning we don’t see it suffering from style headwinds as acutely as typical ‘value’ or ‘growth’ managers,” Ler said, adding that there are no reputational fallouts that warrant mass redemptions, as was the case with Magellan.
“The sheer size of GQG’s FUM (US$153 billion) means it is capable of earnings growth from the compounding of portfolio returns even if net flows are challenged.”
In December, Ler told InvestorDaily that boutique asset managers lack a sustainable competitive advantage and are increasingly vulnerable to competition from both higher-performing active managers and passive investments.
At the time, Platinum had just announced that Regal’s planned acquisition was terminated, an event Ler described as having “likely” been exacerbated by ongoing net outflows at the fund manager over the past two months.
On the same day, GQG announced its funds under management (FUM) remained reasonably steady in November, after its share price plunged by as much as 20 per cent following the news that executives of Adani – a key holding of GQG – were charged with alleged bribery in the US.
At the time, Ler said that while he does anticipate elevated gross redemptions in the short term, this would not impair GQG’s ability to gather new client funds.
Unconventional firms poised for growth
Overall, in Morningstar’s latest analysis, Ler said active managers are expected to face various challenges, including greater scarcity of undervalued securities, pressure to remain fully invested to avoid underperformance and competition from passive funds that simply track the market.
He noted that firms specialising in more unconventional products are better positioned for growth in this environment.
“These include investments in private debt, private equity and specialised fixed-income strategies, such as diversified credit or non-investment grade debt – which go beyond purchasing low-risk bonds,” the analyst said.
“Such products typically carry higher risk, are accessible only to select investors, require intensive management or involve subjective valuations, making them more difficult to replicate with passive investments.”
