There are a few different reasons why the shares of Australian Ethical Investment Limited (ASX: AEF) may be interesting to growth investors.
A quick overview of what Australian Ethical does
According to the ASX, Australian Ethical has a market capitalisation of $553 million.
Australian Ethical is a fund manager that aims to invest ethically on behalf of its investors. Its funds try to avoid businesses that are doing harm to the environment, people and animals. Australian Ethical invests in companies that are creating new technologies, building a clean future, finding medical solutions, create more sustainable products and so on.
It has been operating since 1986 and tries to provide investors with investment management products that align with their values and provide competitive returns. Investments are guided by the ‘Australian Ethical Charter’ which shapes its ethical approach and underpins both its culture and its vision.
Here are three reasons why Australian Ethical could interest some investors:
Aligned to the growth of superannuation
As a superannuation fund provider, Australian Ethical is exposed to the growth theme of superannuation. Most employees have 9.5% of their wage contributed into their superannuation account. There are also tax benefits with super that can attract non-employees to contribute, as well incentivise employees to add more than the mandatory minimum amount.
This attractive form of retirement saving leads to regular fund inflows to superannuation funds. The Association of Superannuation Funds of Australia said that Australia’s total superannuation assets totalled $2.9 trillion at 30 June 2020.
Funds under management (FUM) growth
Australian Ethical generates its revenue from the funds that it manages. Most revenue comes from the base management fee, though performance fees can also be generated if an Australian Ethical fund outperforms its respective benchmark.
In FY20 its group FUM rose by 19% to $4.05 billion, with net inflows of $660 million (which was an increase of 100%). The growth was helped by a 20% increase in customer numbers. One of the things that Australian Ethical was most proud of in the result was a net promoter score of +63 for its super funds and +58 for managed funds, which was among the best in the industry. The company also has a top quartile staff engagement score of 86%.
In the latest quarterly update, for the three months to 30 September 2020, Australian Ethical’s FUM grew by 6.5% to $4.32 billion. It saw $0.10 billion of net inflows for superannuation and $0.06 billion net inflows for its managed funds.
The FUM growth translated into financial growth during FY20. Australian Ethical’s revenue grew 22% to $49.9 million, with a $3.6 million performance fee generated from the outperformance of its emerging companies fund.
Underlying net profit after tax grew by 42% to $9.3 million and net profit after tax (NPAT) grew 46% to $9.5 million. Excluding the impact of the performance fee, revenue and underlying net profit both rose by 15%.
This profit growth funded a total FY20 dividend of 6 cents per share, which was an increase of 20%. The company said it has a strong balance sheet with no gearing.
In terms of FY21, Australian Ethical said the revenue growth will be partly supressed by the full year impact of the super fee reductions to benefit existing and future members. The FY20 performance fee is also not guaranteed to be generated again in FY21.