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BT Investment Outlook A Little Less Rosy

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After a strong performance over the last several years the December (first) quarter has revealed a more mixed outlook for BT Investment Management's ((BTT)) JO Hambro business. BT Investment's funds under management (FUM) of $98.1m were 2.4% higher in the quarter, although below some broker estimates. The miss was largely driven by net outflows, which can be explained by the realisation of $2.7bn of Westpac ((WBC)) MySuper redemptions in addition to negative net flows for JO Hambro.

JO Hambro recorded a performance fee of $47.5m that will contribute around $17.8m to cash net profit, or 9% of earnings. Morgans calculates that nine investment strategies contributed to the fee but estimates the UK Equity Income fund contributed around 85%. UBS suggests future flow and performance fee prospects at JO Hambro are highly reliant on a handful of funds performing well and this risk is not fully reflected in consensus earnings estimates.

The broker believes the stock is fair value, both in absolute terms and relative to peers, but continues to envisage downside risks to outer year expectations. Analysis suggests only three of the JO Hambro retail funds generated performance fees and the remainder, which now account for 70% of performance fee assets under management (AUM), are trailing high watermarks by -5.9% on average.

Outflows were expected during the quarter because of the Westpac MySuper transition and a pre-announced institutional mandate loss for JO Hambro. Credit Suisse notes this is the first quarter of outflows for JO Hambro under BT Investment Management's ownership. The broker is not too concerned, noting the stock is trading on a forward earnings profile that is broadly in line with UK peers and this appears fair given the quality of the core franchise. Therefore, outflows during the quarter were probably one-off in nature but if they were to persist this would pose downside risk.

Credit Suisse has factored in more conservative forecasts and considers the risk is now skewed to the upside from a beat on performance fees. Given the near-term uncertainty regarding the outlook for flows, and the impact of MIFID2 implementation on the company's business model, Ord Minnett is also retaining a Hold rating on the stock. The broker notes flows have started to slow in recent quarters for JO Hambro, given significant growth over the past four years.

While acknowledging one-offs played a part, with the implementation of MIFID2 this month – and the impact on the company and industry not yet quantified – the broker believes the outlook for flows in the UK business remains uncertain. MIFID is the framework of European Union legislation for investment intermediaries that provide services to clients around financial instruments.

Morgans returns to an Add rating and asserts the company's diversified markets exposure supports a solid outlook for the medium term. The previous Hold rating was based on a short-term view to assess the first quarter flows. The outflows for JO Hambro were largely concentrated in previously disclosed mandate losses and therefore the broker considers the outlook unimpeded.

Morgans expects further retail redemptions in the UK Opportunities fund are likely but this impact will recede over the next two quarters. In the medium term equity markets remain constructive, with the company having a diversified exposure across global markets. The main downside risk, in Morgan's view, is a sustained underperformance of the company's major funds and material outflows as a result of market uncertainty.

Macquarie is encouraged by the strong FUM performance and the underlying $1.1bn of inflows. The broker still expects a further $800m to $1.0bn of redemptions from Westpac in the next two quarters as the reconfiguration of My Super is finalised but, besides this, considers the underlying momentum remains positive.

There are three Buy ratings and three Hold on FNArena's database. The consensus target is $12.03, suggesting 4.8% upside to the last share price. Targets range from $11.10 (Credit Suisse) to $13.20 (Morgan Stanley). The dividend yield on FY18 and FY19 forecasts is 4.4% and 4.9% respectively.

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