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Perpetual vs Magellan

Perpetual (ASX: PPT) is a company steeped in tradition. Formed in 1886 and listed in 1964, the firm has long been recognised as a leading Australian funds management firm with an enviable track record of outperformance. In 2007 Perpetual was riding high. Its share price had cracked the $80 mark and its funds under management (FUM) had broken through the $40 billion level in May of that year. That was of course pre-GFC.

Last week Magellan Financial Group (ASX: MFG) became, as measured by market capitalisation, the larger of the two companies. How did it come about that two ex-investment bankers Hamish Douglass and Chris Mackay, who set-up shop in 2006 and opened Magellan for business in 2007, have from a standing start, so dramatically outpaced Perpetual?

Over the 2007 to 2013 period, Perpetual’s shares have fallen from $80 to $41.44, Magellan’s meanwhile have risen from $2 to $12.47. Over that time Magellan has grown funds under management from less than $400 million to a staggering $14.7 billion! Meanwhile Perpetual’s FUM has declined to $26 billion (as at March 2013) from $40 billion.

Magellan’s FUM is still less than Perpetual’s, however the divergent share price performances and subsequent market capitalisations show that investors are backing Magellan ahead of Perpetual. Magellan’s market capitalisation at $1.9 billion now exceeds Perpetual’s $1.75 billion.

It begs the question how have two guys got it so right while the historic, steeped in tradition Perpetual has gotten it so wrong?

The answer may lie in the aim which Douglass and Mackay set out to achieve. As stated in their early reports: “we believe that there is a substantial opportunity to build a world-class Australian-based asset management business focussed on global equities and infrastructure.”

It’s possible the aim of ‘doing one thing and doing it well’, as opposed to Perpetual’s ‘all things to all people’ type approach is the key. However more likely it has been Magellan’s focus on providing an international funds management capability to Australian investors which has been the ‘winning formula’. It then comes down to execution and that is where Perpetual failed. Perpetual’s management correctly identified the demand for international equity funds and indeed had a head start on Magellan.

In 2004 Perpetual set up a Dublin-based office to manage international investments and set aside a war chest to build the business which was indeed larger than Magellan subsequently spent. Ultimately however the Dublin venture was unsuccessful. This led to the current outsourced arrangement with a Boston-based manager in 2011. Whether this switch to outsourcing will provide the solution still remains to be seen but one thing Perpetual shareholders can be sure of, is so far they have not been well served by successive management attempts to capture a share of the domestic demand for international equities.

Magellan

Source: Google Finance

Foolish takeaway

The return Magellan has generated for shareholders once again proves to investors the benefit of identifying an opportunity earlier and then sticking around to ‘let your profits run’.  The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has fallen 8.8% since Magellan listed in December 2006, Perpetual has fallen nearly 43% while Magellan has soured 472%. An investor who stuck with the company as it grew has captured all those gains.

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Motley Fool contributor Tim McArthur owns shares in Perpetual.

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