Why the funds management industry faces big trouble

Standard & Poor’s (S&P) released its semi-annual report of US fund manager returns earlier in September, revealing that 90.2% of active fund managers under performed the broader US S&P 500 Index. Importantly, the report stated that US fund managers experienced net funds under management (FUM) outflows of approximately $328 billion, whilst lower cost exchange traded fund (ETF) index trackers, similar to Vanguard’s US Total Market Shares Index (ASX: VTS), collectively grew funds by around $401 billion.

The telling statistics indicate that the funds management industry may be in peril, with fund managers all around the world having to prove their worth to command their lucrative commissions and management fees. This could spell trouble for Australian fund managers that don’t perform.

Although the S&P/ASX 200 Index (ASX: XJO) is littered with fund managers like AMP Limited (ASX: AMP), Perpetual Limited (ASX: PPT)IOOF Holdings Limited (ASX: IFL), Magellan Financial Group Ltd (ASX: MFG) and Platinum Asset Management Limited (ASX: PTM), I believe the latter two are the best value at current prices. Here’s why.


Magellan is a leading international fund manager based in Australia. It has a long history of consistent shareholder returns, with the group boasting over $39 billion in FUM (as at 30 June 2016).

Unlike other peers, Magellan’s strong brand and long-term reputation provides it with momentum for funds inflows, with the company reporting FUM grew 27% in the 2016 full-year. This enabled management to grow both net profit after tax and earnings per share by 14% and 13% respectively in 2016.

Whilst its share price surged higher in reaction to its strong results, the current price of $22.25 places its shares on a trailing price-earnings of a touch under 21x. Although this is slightly expensive for a fund manager, if management can continue to deliver on its history of strong FUM growth in the coming years, its current price would be a bargain.

Platinum Asset Management

In my opinion, Platinum is one of the best picks in the funds management sector with FUM sitting at a whopping $23 billion. Though this figure has fallen over 10% in the last 12 months, Platinum remains a highly profitable business, earning approximately 1.3 cents per dollar of FUM.

Given its relatively large weighting of retail clients, who are generally stickier than institutional investors, Platinum reported revenue was only 4% lower for the 2016 full-year (despite FUM falling 10%). This allowed management to pay a 16 cents fully-franked final dividend, placing its shares on a trailing yield of approximately 6.2% at current prices.

Management recently announced a share buy-back which, in my mind, should provide medium-term support to its share price and give it time to return to FUM growth. Accordingly, its prevailing share price offers investors a good mix of income and growth prospects.

Foolish takeaway

The introduction of readily accessible ETFs like the Vanguard Australia Share Index ETF (ASX: VAS) and BlackRock’s iShares S&P/ASX 20 ETF (ASX: ILC) means the future for fund managers looks bleak as investors and self-managed super funds take investing into their owns hands and track the broader index.

Nevertheless, fund managers that have a long-term history of market-beating returns, sound leadership and high profitability should always remain in vogue. Accordingly, whilst not free from risk, I believe Platinum Asset Management and Magellan are worthy of long-term investment at current prices.

How 1 Man Turned $10K Into Over $8 Million

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.