Financial Services: Fund managers - June 2022 mark to market

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

12 July 2022, 9:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• We mark-to-market forecasts for GQG Parters (ASX:GQG), Magellan Financial Group (ASX:MFG), Pendal Group (ASX:PDL) and Pinnacle Investment Management Group (ASX:PNI).
• Market moves in the June-22 quarter include: ASX200 -12.6%; MSCI World - 17.8%; MSCI World AUD -9.6%; S&P500 -17.8%; FTSE -5.4%; AUDUSD -8.1%.
• GQG and MFG have reported June-22 FUM and flows. June-22 quarter flows in order of strength: GQG (US$2.8bn inflow; ~12% flows/starting FUM); PNI (we expect mild inflows in both retail/institutional); PDL (we expect accelerated US outflows); and MFG (A$5.2bn outflows; ~30% outflow/starting FUM).
• Our current sector preference order is: GQG, PNI, PDL, MFG. PNI (Hold): structural growth but a premium valuation; PDL (Hold): accelerating US outflows; MFG (Hold): least preferred with risk of accelerated retail outflows and retail fee cuts (new CEO).
• Our preferred pick across is GQG (Add). We view the balance of investment performance, flows strength, and valuation as attractive.

GQG Partners (GQG) – Add

GQG ended Jun-22 with US$86.7bn in FUM, down 8.4% mom (US$94.6bn); and down 4.9% in CY22 YTD. Three (of four) strategies underperformed in the month. On a three-year basis, relative investment outperformance is approximately: Global Equity +3.6% pa; US Equity +6.8% pa; International +2.3% pa; and Emerging Markets -0.5% pa.

GQG’s June-22 quarter inflows were US$2.8bn, in line with our estimates for the quarter. The flows run rate remains solid at ~US$10m pa (MorgansE FY22 US$9.2bn). We expect net inflows to slow to ~US$6bn pa from 2H22.

View: EPS downgrades of ~6-10% on lower June-22 FUM. We expect GQG’s solid investment outperformance (1-3 years+) will cement the FUM base and near-term outlook for flows. Trading on <11x FY22F PE, we maintain an Add rating.

Magellan Financial Group (MFG) – Hold

MFG reported Jun-22 FUM of A$61.3bn, down ~5.7% over the month (May-22 A$65bn). Global equities accounts for A$33.3bn of the A$61.3bn FUM base.

Net outflows for the quarter were A$5.2bn, comprising A$3.5bn in Insto and A$1.7bn in Retail. The listed open-ended Global fund vehicle (MGOC) averaged monthly outflows of ~A$335m, annualising at ~42% FUM outflow pa.

View: minor FY22 EPS change and ~3% FY23/24 downgrades. We view the risk/reward as unfavourable until more certainty is achieved on the FUM base. There remains risk of accelerated retail outflows (fund rating changes) and fee reductions (new CEO).

Pendal Group (PDL) – Hold

We expect PDL FUM to fall ~7.5% to ~A$115.5m as at June-22. Investment performance (absolute) for the quarter across some of PDL’s major funds include (approximately): TSW International -12.8%; JOHCM International Select -20.5%; UK Equity Income -8%; Global Select -19.9%.

We expect persistent outflows and accelerated outflows in key retail/higher margin US pooled funds (eg, International Select).

View: we downgrade FY22F by 1.2% and ~4.7% in outer years. Whilst PDL is cheap on headline valuation (~10x FY23F PE), we expect outflows to persist (or accelerate) and stabilisation is required to see a sustained re-rating. There is some upside risk from a revisited PPT bid.

Pinnacle Investment Mgmt – Hold

PNI has announced FY22 performance fees (PNI NPAT share) of A$16.4m (1H22 A$6.4m; 2H22 A$10.0m), down ~15.9% on pcp (A$19.5m), however a strong result given markets (10 Affiliates crystalised performance fees in FY22).

We expect the retail flows run rate to have softened further through 4Q22 (from 1H22 ~A$480/month; 3Q A$165m/month), a combination of market conditions and investment performance across some funds (notably growth funds, ie Hyperion).

View: FY22 EPS -4.8% captures PNI’s 2H unrealised loss on principal investments. FY23/24 lowered by ~3% on lower starting FUM. Hold rating on a short-term view, preferring to let the risk of negative market sentiment to slowing flows and market volatility pass (given PNI’s premium valuation to peers).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.