Many investors looking for ways to benefit from a rising stock market over the course of 2013 piled into pure play fund managers. Two large, domestic-focused fund managers which each recorded significant share price appreciation over the past year were BT Investment Management (ASX: BTT) and Perpetual (ASX: PPT). These two firms have market capitalisations of $1.4 billion and $2 billion respectively and produced returns for shareholders of 138% and 39% respectively.
These returns outperformed both the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which returned 15% for the year and AMP (ASX: AMP) which fell 9%. While AMP is certainly not a pure play fund manager – the firm has exposure to financial planning, banking and insurance amongst other business lines – the significant underperformance of its shares could make it worthy of attention by investors looking for new positions to add to their portfolios in 2014.
The major cause of AMP's underperformance in 2013 was related to its Australian Wealth Protection business. This came under strain due to insurance claim losses, which led investors to downgrade the stock. While the wealth protection issues are of course undesirable, it is likely that they are short-term in nature rather than a long-term structural issue for AMP. Importantly, AMP's other divisions have continued to report pleasing performances during the year, including growth in funds under management.
Foolish takeaway
With a financial year (FY) ending 31 December, AMP will report its full-year results during the first-quarter of calendar year 2014. While there are expectations that provisioning and headwinds may continue to impact the Wealth Protection division in the near term – which could cause continued pressure on the firm's share price – over the longer-term these issues will likely pass and investors will once again focus on the significant market share and strength of the AMP franchise, which could lead to a re-rating of the stock price.
With a FY 2014 price-to-earnings ratio of 12.9 times, the stock trades at a significantly lower multiple to its fund management peers. While the insurance division does deserve to trade at a lower valuation, arguably the discount is too great at present.
