These are volatile times for global equity markets but that's nothing compared to the share prices of listed fund managers.
These stocks often move more violently as they depend on the performances of their share investment to turn a profit.
But it's the 3.1% crash in the Pendal Group Ltd (ASX: PDL) share price that is grabbing most of the attention today as its one of the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index's biggest losers.
The underperformance is particularly contrasting when put beside the 2% rally in fellow fundie Magellan Financial Group Ltd's (ASX: MFG) share price, the 1% gain in Perpetual Limited's (ASX: PPT) share price and the relatively modest 1% loss in Platinum Asset Management Limited's (ASX: PTM) share price.
Pendal is getting spanked with the wooden spoon after Credit Suisse downgraded the stock to "underperform" from "neutral".
It's not only the near-term headwinds from falling share markets that's left a bad taste in the broker's mouth. Credit Suisse also notes that Pendal is trading at around a 25% premium to UK and EU fund managers.
"We have lowered our forecasts in FY19-20 by 12-14% due to the fall in equity markets this month and lower performance fees in FY19-20E," said Credit Suisse. "Our earnings are now ~10-15% below IBES consensus."
Even then, the broker thinks it's bearish estimates may not be bearish enough as it has included $1 billion in capital inflows to Pendal's wholly owned subsidiary J O Hambro Capital Management, which the broker admits may be too optimistic.
The problem is that Hambro is not performing well and it will be interesting to see how willing investors are to give the fund manager even more capital to manage (or even keep capital in the fund).
Hambro has not been able to hit its performance targets and that also means it can't collect precious performance fees. Its performance is so bad that it will probably see a big drop in fees in FY19 as the broker noted that it can't meet 90% of its targets.
Throw in a high fixed cost growth of 10% for the current financial year and you can see why Credit Suisse is urging investors to bail.
High fixed costs also mean that a drop in revenue will lead to a bigger decline in profit and the broker is tipping an 11% cut in Pendal's earnings per share in FY19 when compared to the previous year.
I think Magellan makes a better investment option while some experts also believe that a rebound in the share market in emerging countries will set Platinum Asset Management up for a strong recovery as the latter is significantly exposed to emerging markets.
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