The Perpetual Limited (ASX: PPT) share price is down 5.4% to $41.69 in afternoon trade after the Australian share market focused funds manager, financial advice, and trustee services business issued investors a disappointing trading update.
It revealed that for the quarter ending June 30 2019 its funds management business suffered $1.1 billion of net outflows that included $1.2 billion in outflows from Australian equities across the institutional and intermediary channels.
Perpetual finished the quarter with $27.1 billion in funds under management, which is $0.3 billion less than the prior quarter as strong equity markets supported $1.1 billion in appreciation that was still more than offset by the outflows.
For reference, I took at look what Perpetual's FUM stood at 10 years ago on June 30 2009, with the $26.2 billion result showing how the company has effectively gone backwards for 10 years when you consider that this period has been one of the strongest bull runs ever for equities since the bottom of the GFC in March 2009. In other words if FUM flows had been neutral over the whole decade total FUM should still have soared just on the back of market appreciation alone since the GFC.
In response to its struggles Perpetual undertook a huge cost-cutting program between 2011-2015, but now the costs have been pulled out the same old problem of it struggling to deliver top-line growth remains.
In its defence there has been a strong trend for retail investors to invest more into ultra-low fee index tracking funds ahead of actively-managed higher fee sort of funds offered by Perpetual, but on the other hand Perpetual should also be a beneficiary of Australia's exponentially growing superannuation pool.
Investment returns have also commonly underperformed the market over the last 5 years in a result the group has blamed on its "value" investing style being out of favour, which is true as growth type stocks have powered ahead on the back of lower cash rates and higher earnings growth.
Finally, it's also been in the firing line as powerful industry funds remove large mandates from the likes of Perpetual in order to manage the funds in-house themselves, which makes sense if the industry funds have the investment capabilities themselves.
Again though it's worth noting that performance tends to speak for itself whether that be to industry superfunds, standalone pension funds, or retail investors, and part of Perpetual's problem has been its weak investment performance.
As there seems little doubt if it had offered the industry funds consistent outperformance over the last 5 years it's more likely than not they'd have left their money with it.
It's also notable that while industry super-funds might be yanking more mandates in house, there's still eye-wateringly large amounts of institutional capital out there seeking a home, but Perpetual does not appear to be winning much of it.
Outlook
Generally as an investor you won't make money over the long term buying shares in fund managers that cannot consistently growth their FUM via inflows and market appreciation. As we can see the Perpetual share price is substantially lower than where it was 5 years ago and way below levels it was in 2007.
On the other hand a business like Magellan Financial Group Ltd (ASX: MFG) has grown its FUM from virtually nothing in 2009 to $86 billion today despite facing the same passive investing headwinds as Perpetual. Magellan shares are up from 62 cents in July 2009 to $56.80 today!
It does operate in the international equities space that offers large total addressable markets, but again Perpetual has not made a success of its push into the international equities space despite it seemingly have the platform and funding to do so on paper.
For Perpetual shareholders the question is whether the business will ever be able to deliver consistent inflows in the context of its track record, the growing preference of retail investors to invest in low-fee funds, and perhaps most worryingly of all the potential for more industry funds to yank large mandates away from the business.
