In August 2017, Dr Shane Oliver, the Chief Economist at AMP Limited (ASX: AMP) wrote that "the key lessons for investors from the Global Financial Crisis (GFC) are that: high returns come with higher risk; while each boom bust cycle is different, markets are pushed to extremes of valuation and sentiment; be sceptical of financial engineering or hard-to-understand products; avoid too much gearing or gearing of the wrong sort".
AMP, one of the largest financial services companies on the ASX, was badly affected by the GFC. Its share price collapsed by over 64% in 2 years from a high of $10.86 in 2007 to a low of $3.83 in 2009.
Since then, AMP's performance on the ASX has been poor with an average Total Shareholder Return of 0.8% per year over the last 10 years according to Morningstar.
AMP's management has a strategy that they hope will start to deliver superior returns for their shareholders. This strategy aims to 'tilt investment to higher growth, less capital intensive businesses' whilst unlocking value from their lower growth businesses such as life insurance.
There was talk in the AFR late last year that AMP might be looking to sell its Life business which was not welcome news for Australia and New Zealand Banking Group (ASX: ANZ) and Suncorp Group Ltd (ASX: SUN) who were looking to do a similar thing.
The strategy aims to increase focus on the growth businesses within AMP (wealth management, AMP Bank and AMP Capital), as these are set to benefit from structural trends, which include:
- an ageing population
- the growth of superannuation assets in Australia and
- demand for financial advice
The AFR reported at the end of last year that AMP was partnering with fast growing financial advice US start-up United Capital to remake financial advice in a move that chief executive Craig Meller said could be worth billions of dollars in revenue.
Can this strategy deliver superior returns? The market appears to be adopting a wait-and-see approach with top broker Morgan Stanley assigning a 60% probability weighting to their base case valuation of $5.60. AMP shares closed last Friday at $5.24.
It will be interesting to hear the update from management on how their strategy is progressing when they release their FY 2017 full year results on 8 February 2018. Investors hoping for superior returns at last are best reminded that high returns come with higher risk.
