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Why I’m still not banking on Perpetual shares

Perpetual Limited (ASX: PPT) shares are down 1.1% to $36 in trade today after the equities manager, financial advice and trustee business posted a net profit of $115.9 million for fiscal year 2019.

This is around 5% below the $122 million on average expected by professional analysts. 

The profit is down 17% with revenue of $514.1 million down 4% on the prior fiscal year. The group will pay a final dividend dividend of $1.25 per share to take full year dividends to $2.50 per share on earnings of $2.44 per share. The group reported this as a 100% payout ratio, but on conventional assumptions it looks slightly above.

While the trustee and advice businesses put in respectable performances given the turmoil around the Royal Commission the 29% profit fall at its core funds management business, Perpetual Investments, is what dragged the result lower.

Over the year Perpetual Investments saw net outflows of $4.3 billion in part due to an industry super fund or two reportedly yanking large mandates to manage in house.

This can happen in the world of funds management though and the other external factor pressuring Perpetual is the growing popularity of low-cost index tracking funds with retail investors. 

The internal factor causing it headaches is the poor investment performance across a number of its funds in a result it blames on the popularity of growth investing over value investing. 

Of course good investment performance helps retail distribution and institutional development, but it’s glaringly obvious that its biggest weakness since the GFC has been a lack of quality resources or professional ‘know how’ in this area.

After all if it had the ‘know how’ it’s hard to believe the business would have such a poor record of FUM outflows.

As the reality is FUM flows are far from just linked to investment performance, but also marketing, sales, networking, reputation, experience, expertise, and staff know how, among other factors. On this front Perpetual has disappointed for a long time. 

The overall result looks even worse in the context of very strong equity markets over the 6 months to June 30, 2019. 

Perpetual has a newish CEO looking to fix its problems and The Australian newspaper reports he has moved to ‘part ways with’ its Head of People (recruitment) and Culture which looks a good start given one of the underlying issues is not enough high-quality recruitment and a culture with little focus on shareholder or business goals.

After all Perpetual is a services business only as good as its staff.

The stock is down around 25% over the past 5 years and has gone nowhere since 2001.

I’d suggest serious investors focus on fund managers where it’s hard to get in the door and staff work long hours partly thanks to a hungry culture and heavy alignment to shareholder interests. Magellan Financial Group Ltd (ASX: MFG) and Macquarie Group Ltd (ASX: MQG) come to mind. 

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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