Financial Services: Fund managers & Platforms - mark to market

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

04 April 2022, 10:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• We mark-to-market forecasts for equity market linked stocks.
• Volatility has been prevalent through 1QCY22. Market moves (approx) include: ASX200 0.7%; MSCI World -4.2%; MSCI World AUD -7%; S&P500 -5%; FTSE 1.8%; MSCI EU -6%; MSCI EM -6.3%; AUDUSD +3.3%; and AUDGBP +6.1%.
• Across fund managers, we expect volatility and investor caution to have impacted flows through 1QCY22 and persist into 2Q. Flows in order of strength: GQG Partners (ASX:GQG) (solid inflows); Pinnacle Investment Management (ASX:PNI) (mild inflows); Pendal Group (ASX:PDL) (moderating outflows); and Magellan Financial Group (ASX:MFG) (large outflows).
• Our preferred stock across fund managers is GQG. We view the balance of investment performance; flows strength and valuation as attractive. The key risk is heavy key-man reliance. AUD strength is the headwind.
• Our preferred stock across Platforms is HUB24 Limited (ASX:HUB). We view Netwealth Group (ASX:NWL) as a high quality business, however see HUB’s relative valuation as more compelling vs the expected growth/earnings potential of both groups over the next five years.

1Q CY22: flows in focus

Platforms

We view the structural backdrop as supportive for flows into specialist platforms (NWL, HUB), providing resilience through periods of volatility. Flows from new adviser growth (client transitions) provides a lagged and more stable flows backdrop.

We expect 3QFY22 inflows of: NWL A$2.8-3.2bn (2H22F A$6.6bn); and HUB A$2.6-3.0bn (2H22F A$6.0bn).

Fund managers

Current flows strength is GQG (strong inflow); PNI (slight inflow); PDL (meaningful/slowing outflows); and MFG (large outflow). We expect GQG to record ~US$3.5bn inflow for the quarter; and solid investment performance should solidify inflows through CY22. We expect the volatility to have slowed PNI’s inflows significantly, however expect retail flows to still be mildly positive.

PDL’s outflows should show an improved trend, however are still a meaningful headwind. MFG’s outflows are significant (as flagged/reported), which we expect to continue (insto outflows short-term and risk of accelerating retail outflows).

Mark-to-market earnings adjustments

Platforms

No market to market earnings changes. Our near-term (2H22) FUA forecasts include no investment performance impact. We expect a small negative market move impact in 1Q22 (~2%).

GQG Partners (ASX:GQG)

We downgrade FY22-24 EPS by ~1.7%.

View: GQG has delivered solid investment outperformance (~8-10%) across Global and US strategies through the quarter, which should solidify the CY22 flows outlook. Add maintained.

Pinnacle Investment Management (ASX:PNI)

We downgrade FY22-24 EPS by 1%/6.5%/4.5%. We downgrade 2H22 group FUM by ~2%, driven primarily by Global affiliates (Hyperion and Antipodes assumed FUM ~7.5% lower).

View: We expect soft flows in 3Q22, however still in positive territory. We retain an Add recommendation on a long-term view, however caution PNI’s premium valuation (~25x FY22) leaves the stock susceptible to near-term market volatility.

Pendal Group (ASX:PDL)

We downgrade FY22-23+ by 8%/~12.5%. Mar-qtr FUM levels have been impacted (expected down ~9.2%) by mixed investment performance (significant funds, International & Global Select down ~13%) and currency headwinds.

View: we maintain an Add on valuation grounds, however earnings are heavily reliant on market direction and flows need to stabilise for a sustained re-rating.

Magellan Financial Group (ASX:MFG)

We upgrade FY22-23+ by 1%/~6%, driven by recent market moves.

View: we continue to expect further significant outflows. We view the risk/reward as unfavourable until more certainty is achieved in the FUM base.

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