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Is the AMP Limited share price a turnaround opportunity?

The AMP Limited (ASX: AMP) share price is trading flat at $5.17 after the wealth management, insurance, and financial planning group updated investors on its latest growth strategy today.

The group’s big problem over the recent past has been the underperformance of its life insurance business, although over longer time frames it has encountered multiple other problems with the shares down 50% over the past 10 years.

Today the group’s CEO flagged that the business will look to tilt to “higher growth, less capital intensive” operations in a bid to drive profitability and presumably shareholder returns higher.

China Growth

Like many Australian businesses searching for growth it seems AMP wants to pivot to the world’s second-largest economy in China. It is doing this by partnering with China Life Group in offering pension products to investors or vanilla asset management products across local and international capital markets.

In effect it seems AMP is looking to replicate its core Australian business in China and is “targeting earnings of around $50 million per annum from the China businesses within 5 years”.

Australian Strategy

In 2016 AMP posted a net loss of $344 million (mainly due to write downs in its insurance business) and an underlying profit of $486 million. So, while the China strategy is all well and good, management’s main focus should be on transforming the core Australian business.

The group hardly mentioned the future of its insurance business in today’s update with banks like Macquarie Group Ltd (ASX: MQG), National Australia Bank Ltd (ASX: NAB) and Australia & New Zealand Banking Group (ASX: ANZ) all moving to sell all or part of their insurance operations in recent times.

In developed markets like Australia providing life and other general insurance services is a low margin, capital intensive, scale game, with consumers demanding more and premiums coming under pressure. So the lack of detail over a coherent plan for the transformation of AMP’s insurance business may not impress investors.

Today’s strategy update also included plans for AMP’s main profit earner in its Wealth Management division. Management stating that it plans on “broadening its revenue streams via increasing contributions from advice and SMSF, while continuing to invest in product and platform development”.

AMP Capital, which is essentially the group’s giant investment management business is also focused on growing revenue steams in particular via new infrastructure and real estate investment funds that have been growing well for the business.

Outlook

Despite its vast scale advantages, wide distribution networks, and the tailwinds of Australia’s compulsory superannuation system alongside an 8-year global equity bull market the AMP share price has fallen in half over the last 10 years.

The main problem with AMP as an equity investment is that its sheer size means it’s hard for the business to get costs under control, while efficiently executing on a business model to drive sustainable profit growth. The result is little internal focus on shareholder returns, as staff are perhaps understandably more focused on their own salaries than business performance.

Although AMP’s performance may improve with time, as an investor in the financial services space I would suggest focusing on founder-led businesses with a tight control on costs, recruitment, and execution – alongside heavy insider ownership of the shares. After all, human capital and management are the core strengths or weaknesses of any financial services business.

Two of the best businesses ticking some of the boxes on this front are Magellan Financial Group Ltd (ASX: MFG) and Macquarie Group. Overall, despite today’s “turnaround” plan, I expect both Macquarie and Magellan will go on to crush the 10-year returns of AMP from here.

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited and Magellan Financial Group.

You can find Tom on Twitter @tommyr345

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.

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