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Morningstar | Pendal Group Remains our Preferred Pure Play Asset Fund Manager, AUD 11 FVE Unchanged.

Narrow-moat-rated Pendal Group was recently placed on our Global Best Ideas list and remains our preferred pure play domestic asset manager. We particularly like the firm’s diversity across asset class exposures and geography, as well as growth opportunities being explored in the United States. Furthermore, the industry continues to benefit from favourable demographic tailwinds and secular growth in compulsory superannuation contributions. On the other hand, the industry continues to face fee pressure from increasing competition, particularly low-cost passive alternatives, an uncertain political climate in the United Kingdom and the risk of weak investment markets globally. Nevertheless, the company screens as undervalued at current prices and continues to be supported by an attractive grossed up dividend yield of approximately 6% for fiscal year 2018.

In its most recent June quarterly update, Pendal reported a slight increase in total funds under management, or FUM, but the result was marred by a disappointing performance in the U.K. subsidiary, JO Hambro. The quarterly AUD 1 billion increase in total FUM to AUD 100 billion was the result of a net AUD 1.2 billion increase in Pendal Australia FUM and a net AUD 200 million outflow in JO Hambro FUM. Not long after the disappointing JO Hambro performance was disclosed, Pendal Group announced the departure of Ken Lambden, the CEO of JO Hambro, effective immediately. A global search for his replacement remains under way with no indication of when a replacement will be announced. Changes to the global executive team continued this week when Bindesh Savjani, who will begin his new role in February 2019, was announced global chief risk officer.

Another drag on Pendal’s stock price in recent months has been Westpac’s expected sell down of its 10% stake in the asset manager. According to Westpac, it intends to sell when market conditions are favourable enough to do so. We anticipate this transaction to take place in calendar year 2018, although should market conditions turn less favourable, would likely see it executed in 2019. Until they sell, expect some technical pressure on the share price.

We continue to forecast falling management fee margins across all domestic pure play asset managers, including Pendal, due not only to increasing completion but also aggressive pricing strategies of passive investment alternatives. We expect these pricing pressures to occur across both the institutional and the wholesale businesses. However, the winding down of the Westpac legacy retail FUM, which is the lowest margin of all Pendal’s FUM should provide some offset to falling margins elsewhere.

On the other hand, Pendal stands to benefit from several favourable tailwinds in the medium to long term. Domestic population growth currently tracking at a healthy 1.6%, ageing demographics and a mandatory and increasing super guarantee contribution scheme with rates increasing from the current 9.5% to 10% from 2021, 10.5% from 2022, 11% from 2023, 11.5% from 2024, and 12% from 2025.