Fund manager and financial services business Perpetual Limited (ASX: PPT) posted a poor final quarter for the 2015 financial year, with net fund outflows for the quarter of $1.6 billion.
When you add in a $1.7 billion decrease in funds under management (FUM) due to market depreciation the group finished the quarter ending June 30 2015, with FUM of $30.2 billion, compared to FUM of $34.7 billion for the quarter ending March 31 2015. Ouch.
Compare the most recent figure of $30.2 billion to the figure on July 31 2010 of $27.7 billion and you can see how the group has hardly grown FUM – despite a five-year equity bull market and Australia's system of compulsory superannuation as two powerful tailwinds.
In my opinion the bottom line is that the old underlying problems of being unable to translate decent investment performance into strong and sustained FUM growth have not gone away.
They have been disguised by a radical cost-cutting program over the last thee years that produced earnings growth, but that was the easy part and questions remain whether it can deliver strong and sustainable top-line growth given the embarrassing lack of FUM growth.
The group blamed the recent institutional outflows on clients rebalancing their portfolios, which is part of the normal course of business for any fund manager of a decent scale. However, it's the volume of outflows in the institutional channel ($1.7 billion out of an original FUM of $12.2 billion as at March 31) that should set alarm bells ringing for investors in this business.
Not long ago I questioned whether investors should consider if Perpetual was running out of steam – despite a range of buy ratings from brokers and some serious cheerleading from the respected business media.
In my opinion investors need to look toward a Perpetual board that took two years to wake up to the reality of the GFC and launch a cost-cutting program in 2012, while progress in developing a credible strategy to move into the international equity space has also been slow. The alternative for Perpetual is to soldier on in an Australian equity space that no longer looks to be popular with institutions (given the outflows), while Perpetual's private advisory and trustee businesses tick over with little prospect of ever shooting the lights out.
Unsurprisingly, the stock is down around 23% over the past 10-year period and given the latest news on FUM flows it looks a sell in my opinion.
Why would you buy stock like Perpetual, when you could own a fund manager like Magellan Financial Group Ltd (ASX: MFG)?
It has exemplary stewardship, no passengers, and continues to pile on the FUM while sitting in the middle of the international equity sweet spot. Unsurprisingly, the stock is up 1,530% over the past five years.
Magellan's investment team is on the record as being fans of the great Warren Buffett and so is The Motley Fool – and it's not for nothing!
