Asset manager Pendal Group ((PDL)) has sustained elevated outflows from Europe, attributed to ongoing risk aversion from investors in the region. Fourth quarter funds under management (FUM) were down -1%.
A deteriorating investment performance across a range of the company’s funds in the UK has dampened enthusiasm. Historically, JO Hambro has been the main driver of fund flows and the outflows from its UK business have affected the underlying performance of Pendal Group. The main outflows were experienced by JO Hambro in the fourth quarter, at -$1.4bn.
Pendal Group’s Australian outflows were concentrated in the Westpac book, which comprises around 39% of FUM, and surprised Morgan Stanley to the downside, with outflows of -$700m. The broker assesses the new outflows relate to Westpac/BTFG exiting financial advice and there is a risk of more to come.
The -$2.3bn of net outflows in the quarter were a minor improvement on the June quarter, although missed the broker’s forecast for flat flows. Morgan Stanley asserts the issues with Brexit are factored into the price, while the medium-term growth options remain attractive.
EU/UK
Morgans suggests a Brexit outcome could be a turning point for macro-driven flows in the EU and UK as well as sentiment towards the stock, although evidence of a better investment performance at JO Hambro is more important.
JO Hambro ended the period with funds under management of $52bn, down -1.5%. Morgans observes three of its six largest funds are materially underperforming on a short-term basis, which will limit performance fees in FY20 and increase the risk of outflows, particularly if there is further pressure in the UK/EU sector.
Credit Suisse expects outflows from the UK business will continue and put pressure on the operating margins. While expenses have been contained and have offset some of the revenue weakness, this becomes harder to repeat.
Ord Minnett agrees political uncertainty in the UK and the potential acceleration in redemptions in the Westpac-related legacy funds are likely to mean the catalysts and near-term outlook remain negative.
Performance Fees
Performance fees are expected to recover over time and, given diversity in geography and asset class, Ord Minnett assesses the current share price presents an attractive risk/reward balance relative to other ASX-listed asset managers.
Credit Suisse notes that, of the JO Hambro funds eligible to earn performance fees, the vast majority are currently below their high watermark for the period ending December 31, 2019. Unless performance improves by the end of the year there is likely be minimal performance fees in the first half.
Citi remains attracted to Pendal Group’s diversified operating model but the combination of outflows from JO Hambro funds and low prospects for a sharp rebound in performance fees are likely to weigh. The broker was encouraged the positive flows into US pooled funds have continued and are becoming broad-based and continues to factor in a slow recovery in performance fees.
UBS envisages near-term risk to flows and limited scope for performance fees through to FY22. There is strong valuation support for the stock but Morgans includes some risk of sustained outflows, and prefers the growth path to be less reliant on market direction.
There are three Buy ratings and four Hold on FNArena’s database with a consensus target of $8.01, signalling 14.4% upside to the last share price. Targets range from $6.90 (UBS) to $9.60 (Morgan Stanley). The dividend yield on FY19 and FY20 forecasts is 6.4% and 6.8% respectively.
