Concerns Linger Over Flows At Platinum Asset

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This story features PLATINUM ASSET MANAGEMENT LIMITED.
For more info SHARE ANALYSIS: PTM

Platinum Asset Management has reduced base management fees and brokers are concerned about the reduction in flows to the business, considering the stock is not cheap.

-Launching two new ETMF products but benefits in the longer term
-Concerns that investors may re-assess the company's funds
-Prospect for a buy-back is expected to support the share price
 

By Eva Brocklehurst

Brokers are concerned about the reduction in funds flows into the business of Platinum Asset Management ((PTM)) as the company re-jigs its fee structure. The company is introducing a performance fee option for each of its eight managed funds. This will be available to direct investors only, in the first instance. The fee changes relate to around $17bn in funds under management or around 75% of the company's total funds under management.

Base management fees are reduced to either 1.35%, with no performance fee, or 1.1%, with a relative outperformance fee of 15%. There is also a standardisation of the performance fee to 15% for some funds that were attracting 20% for outperformance. The net reductions account for around -10% of broker reductions to FY18 forecasts.

Credit Suisse suspects the price reductions are reflecting the drop in the cost of investing in recent years and aligning pricing of the trust funds with the listed funds. The broker believes the performance fee option may also stem outflows for clients that may have been frustrated with the recent underperformance and these price cuts are a specific company response rather than as a result of industry-wide price pressure.

Bell Potter believes the reduction in fees is part of a downward spiral, as the company lost over -$3bn in flows in 2016 and this is likely to have continued into 2017, with over -$1bn suspected as being lost for the first three months of the year. Bell Potter believes the disappointing relative performance of some funds, coupled with key staff departures, and now the reformated fee structure, may cause existing investors to reassess.

Hence there is a risk in the near term to flows, and this comes despite the pending launch of two new exchange traded managed funds (ETMF). The broker, not one of the eight monitored daily on the FNArena database, downgrades to Sell from Hold. Target is $4.20.

Ord Minnett envisages the cut to fees is a measure to stem the outflow to lower-fee managers. The broker now forecasts a -16% fall in earnings per share for FY18. The broker considers, with such a bearish outlook, that the stock is too expensive and also downgrades to Sell from Hold.

CLSA takes a different tack. The broker is of the view that the company is re-positioning to meet the challenges of a different investment world and just assuming the reduction in fees is a response to outflows is too simplistic. Adding different ways for investors to access the company's investment experience is smart, the broker asserts.

Still, CLSA expects a -9% impact on FY18 revenue and a one percentage point contraction to operating margins. The broker, not one of the eight monitored daily on the database, has a Buy rating and $5.35 target.

ETMF products

The company expects to launch the two ETMF products in August and this will allow investors to access its international and Asian equity strategies via the ASX. These ETMFs will have the same portfolio composition, managers and investment strategies as the underlying funds. Fee structure will consist of a 1.1% management fee plus a 15% relative outperformance fee.

Credit Suisse suspects the new products will attract only minimal flows in the near term, given the weak performance of the funds, although envisages longer term potential for these contemporary products. The broker expects ETMFs will become a more significant distribution channel in years to come and could underpin flows in outer years.

Credit Suisse considers the stock expensive, nonetheless, expecting earnings to decline in FY18 by -10% and outflows to persist for a while. Morgan Stanley also suspects the new funds will help generate flows over time but remains Underweight on the stock. The broker, currently, envisages downside risk to its forecasts for -$1bn in outflows in the second half of FY17.

Buy-Backs

Morgan Stanley suspects the buying back of up to 10% of issued capital is likely to support the share price, and the shares will be purchased if the company believes they are trading at a significant discount to intrinsic value, although no target prices been set.

The broker estimates that a full 10% buy-back a current share prices is unlikely as it would exceed available balance-sheet funds.

There are three Sell ratings on FNArena's database and one Hold (Macquarie). The consensus target is $4.31, signalling -2.7% downside to the last share price. This compares with $4.82 ahead of the news. The dividend yield on FY17 and FY18 forecasts is 6.4% and 5.8% respectively.
 

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