This morning ethically-focused fund manager Australian Ethical Investments Limited (ASX: AEF) reported its financial results for the full year ending June 30, 2017. Below is a summary of the results with comparisons to the prior corresponding period.
- Net profit after tax of $2.92m, $3m in prior year
- Underlying profit of $4.235m, up 11% (excluding cost of operational loss)
- Revenues of $28.3m
- Expenses of $25.4m
- Net inflows of $454m, up 42%
- Funds under management of $2.15b, up 38%
- Superannuation members of 35,532, up 34%
- Earnings per share of $2.70
- Final dividend of $2.10 per share, total dividend $2.60 per share
This was generally another strong year of growth for the Australian equities manager that was only clouded by the disastrous effects of a unit pricing error that cost $1.96 million to fix. Generally where clients have suffered a loss as a result of something like a unit pricing or distribution error they must be put back in the position they would have been in but for the loss.
Whereas a fortuitous gain on reversing an incorrect trade for example may sit with the client or fund manager depending on different factors including whose capital was employed in the error coming about.
As a result of the error the fund manager probably had to hire additional fund accountants, investment administrators, or operational risk staff in order to tighten up reporting processes.
As investors in Commonwealth Bank of Australia (ASX: CBA) are finding out, the failure to follow procedures or compliance monitoring plans can lead to costly remediation bills.
The hopefully one-off unit pricing issues aside this still looks an attractive stock the firm is is coming off a small base with just $2.15 billion under management. It's also growing quickly thanks to more retail investors investing their superannuation balances with the group as it widens its distribution network via social media, marketing and other more traditional channels. Australia's ballooning superannuation pile looking for a home to invest is a powerful tailwind for the business.
Over the year the group also announced that it had won an institutional mandate and it is now Australia's fastest-growing super fund, despite competition from big-hitting rivals that offer lower fees as they are run not for profit.
For Australian Ethical the potential to build sufficient scale to win institutional business offers its next growth leg as institutional money mandates are eye-wateringly large, where single mandates at the big end of town could equal AEF's entire FUM as of today.
The other key business driver is investment performance and the group ticks the boxes on this front as well with its Australian shares fund delivering returns 4.6% above its benchmark over the past five year period. Institutional investors and their consultants will typically look to a five-year track record as a minimum, whereas retail investors are likely to throw more caution to the wind in assessing more subjective factors.
Outlook
I reckon this company and stock has legs and you only need to look at the rise of fund managers like Wilson Asset Management Limited (ASX: WAM) or Magellan Financial Group Ltd (ASX: MFG) to see what's achievable when a business has half-decent investment performance, alongside the sales teams and networks to back it up.
The stock is trading on a frothy trailing multiple due to the unit pricing error, but looking ahead it could produce a year of big growth while retaining a strong long-term outlook.
Shares are up 530% over the past five years and I'm a buyer on any price weakness below today's price of $115, as I expect profits and the share price will double over the next five years.
