The Perpetual Limited (ASX: PPT) share price is trading flat at $54.10 today after the Australian-focused equities manager reported net fund outflows of $1 billion for the quarter ending June 30 2017.
In total funds under management (FUM) fell $1.5 billion to $31.4 billion, due to falling equity markets and $300 million in net outflows from its cash and fixed income offerings, alongside $700 million in net fund outflows from its Australian equities offering. Institutional investors accounted for $400 million of the net outflows from the equities channel.
Medium-sized fund managers such as Perpetual, Wilson Asset Management (ASX: WAM), Platinum Asset Management Limited (ASX: PTM) and Magellan Financial Group Ltd (ASX: MFG) have two key challenges. First, to deliver market-beating investment performance, and second to grow FUM by winning new investors.
Investment performance and more new business are correlated to an extent with institutional investors in particular paying close attention to 5-year past performance track records, but for a variety of reasons the two are probably not as closely correlated as many would expect.
Winning FUM in the institutional space is also about star fund managers, client service, and slick business development capabilities, while in the retail space wide distribution networks across financial advisers and platforms is especially important.
This is no secret and the funds management game has operated like this for the past 30 years, yet Perpetual (despite all its advantages) has hardly been able to grow FUM over the past 7 years.
For example, FUM as at 30 June 2010 stood at $26.9 billion and today stands at just $31.4 billion, despite seven years of asset appreciation for equity markets acting as a strong tailwind over the period.
One of its flagship funds in the Wholesale Australian Share Fund has delivered 3, 5 and 10-year returns (before distributions) of -10.7%, -5.55% and -5.89% respectively, which shows why the business hardly impresses institutional investors and their consultants.
The company embarked on a radical cost-cutting plan in 2012 in response to the GFC (three years after many of its peers) which boosted profits, but having played that card it may be running out of bottom-line boosting options.
It also recently lost a case it took to court in an attempt to force a break-up of the cross shareholding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW).
Perpetual brought the case at an estimated expense of $10 million to $15 million and is an investor in the businesses via funds under its control as part of its funds management business.
However, it also has a significant Responsible Entity (RE) business sitting under its Trustee business and the News Corp press is reporting that it brought the claim against Brickworks partly under its role as RE for funds managed by third parties that held Brickworks shares.
It is also being reported by The Australian newspaper that Perpetual may seek to recover (as RE) the costs of the case out of the assets of the funds through which it acts as RE, rather than pay the costs itself, or from the assets of the funds it operates as investment manager that also hold Brickworks or Soul Patts shares.
Perpetual would be able to do this under the terms of its legal agreements as RE with the investment mangers and the funds' constitutions, but it means the real losers in the case (cost wise) are the retail investors in the funds.
Over the past 10 years Perpetual shares are down 34% and investors might want to give the stock a miss.
