In the weekend's Australian Financial Review I noticed an article reporting that fund manger Morphic Asset Management was short selling international equities manger Platinum Asset Management Limited (ASX: PTM) in the belief its shares were likely to fall. Morphic has taken the opposite view on another international asset manager in Magellan Financial Group Ltd (ASX: MFG) in buying shares in the belief they're likely to rise.
According to the report the thesis underpinning these contrarian trades is Morphic's belief that Platinum has insufficiently invested in sales and distribution to market its funds to investors. Indeed, the last time I checked Platinum largely outsourced all of its institutional business development and retail distribution functions to third parties such as MLC Investments or US operators.
Conversely Magellan takes the opposite approach and invests heavily in in-house institutional business development and retail distribution teams. This is partly why I have written multiple times before of my belief that Magellan looked a superior investment to Platinum.
Since this August 2014 article where I suggested Magellan shares were a buy, but Platinum a hold, Magellan shares have gone onto more than double in value whereas Platinum shares have roughly traded flat, despite Magellan trading on a far higher earnings multiple at the time.
So where to next?
To properly understand medium-sized fund managers and potential future returns you must consider that winning new business is almost as important as investment returns. For a long time now mid-cap managers have commonly employed full-time presentations teams responsible for high-quality presentations to pitch for new business alongside institutional business development professionals. Pitches will eventually be joined by the investment teams and CIOs or CEOs themselves as fund managers look to secure fee-spinning new mandates.
A winning growth combination is a strong investment track record (institutions and their consultants naturally look to five-year past performance levels) and slick presentations to impress potential clients.
In the past Magellan has done well in winning new business in Australia and overseas as it attempts to compete with big hitters like the asset management arms of global banks, or AMP Limited (ASX: AMP) for huge mandates from pension fund clients, charities or universities for example.
Smaller fund mangers like Morphic themselves don't have the operational scale to attract large institutional clients and for mid-caps looking to grow in the international equities space the main game remains institutional business development where single multi-billion dollar mandate wins can beat six months of retail FUM inflows.
Magellan and Platinum both offer funds to higher-margin retail investors and Magellan's growth here is accelerating, which is the biggest plus supporting its investment case right now.
Outlook
After the shares returned around 120% plus dividends in a couple of years I sold my entire holding in Magellan well above $24 in correct anticipation of the Brexit vote, although did buy back around two thirds of the holding at prices around $21.50. However, I like Morphic remain uncertain on the prospects of Platinum's plans to outsource business development if it wants to grow in size amidst a ferociously competitive environment for fund managers chasing institutional mandates.
Today's news of more positive retail FUM growth for Magellan into its global equities and infrastructure funds is a big plus and reinforces my conviction that the stock has more long-term upside. However, today's valuation of $23.25 is a touch high given the moderating growth outlook and I expect volatility around US rate rises in September will provide the opportunity to buy more shares around $22. Despite Platinum's cheap-looking share price I think it remains one to avoid until it can return to consistent FUM growth.
