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No Quick Turnaround For Pendal Group

Australia | Jan 15 2020

Brokers suspect fund managers will endure another lacklustre performance over 2020 with Pendal Group indicating only marginal gains in FUM in the first quarter amid subdued performance fees.

-JO Hambro reports its ninth consecutive quarter of outflows
-Improved sentiment surrounding Brexit offset outflows from Europe
-Investment performance and flows need to improve for earnings leverage to emerge
at Pendal Group

By Eva Brocklehurst

The soft performance of many asset managers in Australia is reflected in the first quarter update by Pendal Group ((PDL)), where only marginal gains were made in funds under management (FUM) and performance fees remain subdued.

The outcome was below Credit Suisse estimates and the broker expects the lacklustre performance across the sector will continue in 2020. Pendal Group reported funds under management of $101.4bn as of the end of December 2019, up 1% on the prior quarter.

Ord Minnett assesses the near-term outlook is relatively benign and believes the current share price presents an attractive risk/reward balance relative to the other ASX-listed asset managers. The Australian business procured net outflows of -$500m in the quarter, with outflows in equity strategies unable to be offset by net inflows in cash and fixed income strategies.

Net fund flows were the key area of disappointment for UBS, with -$1.3bn in net outflows spread across both PDL Australia and its higher margin JO Hambro business. Historically, the JO Hambro division has been the driver of funds flows for the company but reported its ninth consecutive quarter of outflows, largely affected by macro economic factors and a weakening underlying fund performance.

JO Hambro ended the period with $53.1bn in funds under management, up 9.7%, with a positive performance being offset by a negative FX impact and net outflows of -$800m. Despite this there were benefits from inflows into UK equity products as sentiment surrounding Brexit appeared to improve, offsetting ongoing outflows from European equivalents.

Citi cautions against extrapolating this UK improvement in the first quarter, as industry data have indicated a tough start to the second quarter. Moreover, the JO Hambro UK Equity Income fund has suffered outflows of -US$700m in January to date.

The rotation away from European equities is continuing unabated and the broker was disappointed that the traditional channel for inflows, US pooled funds, posted the second quarterly outflow in four years.

Credit Suisse also notes, while the UK Dynamic Fund provided an offset to the outflows over the past year, it was put into soft close in early January which means that the tailwind from inflows could dissipate in coming months. Morgans agrees a meaningful turnaround in fund performance is required for some confidence in the outlook and there is likely to be continued pressure on flows and performance fees at JO Hambro.

Performance Fees

Performance fees are expected to stay subdued and JO Hambro performance fees were significantly weaker. Credit Suisse expects FY20 to be a challenging year and without a sustained recovery in fund performance there is downside risk to outer years.

Furthermore, the extent to which five of the company's major funds are performing below benchmark is likely to lead to below-average performance fees in FY21. The miss to estimates has led the broker to downgrade estimates by -3-4% across the forecast period.

UBS also expects headwinds to revenue are likely to persist and lowers FY20 estimates for earnings per share by -1.9%, continuing to envisage limited scope for JO Hambro performance fees in 2020 and 2021.

Citi is less negative on the stock, although concedes a sharp earnings recovery is unlikely in FY20. Nevertheless, the broker is constructive on the prospects beyond FY20. While performance fees are at a nine-year low the broker expects these will partially normalise over time and an improving investment performance from some strategies offers optimism for FY21.

Morgans downgrades to Hold from Add, as the stock has rallied on the back of the improved sentiment in the UK and is now trading in line with valuation. The broker considers the price/earnings ratio of 17x is fair, noting there is effectively no performance fee contribution that is currently being capitalised.

From here on, the investment performance needs to improve as do flows in order for earnings leverage to emerge. Morgans would prefer the company's growth path was less reliant on market direction before taking a more positive view.

Meanwhile, Pendal Group's stable of existing funds have had a relatively poor performance which could make it difficult to attract inflows over the coming year, Credit Suisse adds, having recently downgraded the stock to Underperform from Neutral.

Without a sustained recovery, downside risk to outer year forecasts is envisaged. Moreover, the stock is trading at a 10% premium to UK/EU peers and offers minimal growth so the broker suspects there is also downside risk to valuation.

Credit Suisse's market forecasts now reflect growth in global equity markets and a modest uptick in Australian equity markets. The Australian yield curve has also returned to sloping upwards following the reduction in the Reserve Bank's cash rate in October.

FNArena's database has two Buy ratings, three Hold and two Sell. The consensus target is $8.51, suggesting 2.9% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.3% and 5.8% respectively.

See also, Enthusiasm Wanes For Pendal Group on October 15, 2019.

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