AMP Limited (ASX: AMP) is widely regarded as a blue-chip stock, with a market leading position in the wealth management sector thanks to its early mover advantage, the takeover of AXA Asia Pacific which expanded its client base, and its extensive network of financial planners.
Despite many positive attributes, AMP’s insurance division has been struggling. These issues appears to have cast doubt into investors’ minds and acted as a weight around the company’s share price. This is evident from AMP’s significant share price underperformance in the past year – the stock is down 14%, whereas the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained 5.5%.
This recent underperformance could have opened up a window of opportunity for long-term investors to purchase a quality blue-chip at an attractive price. Here are three reasons to be positive over the long-term outlook for AMP:
1) Just like other fund managers such as Perpetual Limited (ASX: PPT) and Platinum Asset Management Limited (ASX: PTM), AMP enjoys annuity style earnings thanks to its significant assets under management. The combination of AMP Capital which receives fees for managing around $140 billion in Assets under Management (AUM), coupled with the fees from servicing the AUM housed in the Wealth Management division provides shareholders with a relatively stable earnings base.
2) Offshore expansion provides an exciting growth opportunity for the company. AMP now manages $5.3 billion for clients in Japan and recently announced a joint venture (JV) with China Life to offer mutual funds in China. Initial results show the JV to be a success with $2.2 billion already raised for the inaugural fund.
3) Management is focussed on sorting out the troubled insurance division. While the insurance division’s issues may take a while longer to resolve and act as a drag on reported earnings they will ultimately be fixed. AMP is a major provider of essential insurance products to Australians and the demand for many of these products will only grow as the economy grows.
Financial service companies often experience a love/hate relationship with the investment community. It was just over two years ago that Macquarie Group Ltd (ASX: MGQ) was languishing around the $22 mark, while today with its business skewed towards recovering financial markets the share price has more than doubled to over $55.
While the stock market is meant to be forward looking, at times it seems to extrapolate near-term bad news and poor earnings into the future. This can lead to mispricing and opportunity for fast acting investors.
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Motley Fool contributor Tim McArthur owns shares in Perpetual Ltd.