Has Netwealth Been Punished Enough?

Australia | Apr 15 2025

Wealth management platform Netwealth was heavily de-rated amidst heightened March quarter volatility. Has value now emerged?

-Netwealth's fall outpaces the market
-Platform nevertheless sees net inflows
-Structural story intact
-Market risk nonetheless remains

By Greg Peel

What has been lost on some investors, suggested Ord Minnett last week, and which has been highlighted by recent wild market movements, is that specialist financial platform operators should be viewed as market cyclicals, implying fund flows and funds under administration metrics and valuation multiples are inextricably linked to broader market sentiment.

The evidence would appear to bear Ord Minnett's assertion out.

The ASX200 hit a peak in mid-February post a rally driven by Donald Trump's November election win following promises of US tax cuts and market deregulation, leading to an assumption "animal spirits" would be rekindled in Trump's second term. Sentiment was swift to change nevertheless when the threats of tariffs previously brushed off by the market as campaign bluster became more frighteningly real.

By the end of March, the ASX200 had fallen -10% from its peak. Shares in wealth management platform Netwealth ((NWL)) fell -20% over the same period. Following "Liberation Day" on April 2, when stiff tariffs were imposed by Trump on everyone from allies to penguins, the ASX200 fell further to be down -14.5% from said peak. Netwealth shares notched up a -30% fall.

The tariff "pause" Trump announced a week later, due to a collapsing US bond market, sparked a sharp rebound, which had by last week returned both the ASX200 and Netwealth to pre-Liberation Day levels still down, but not as precariously so.

One might assume funds managers of any form would have, since mid-February, seen a rush to the exits of funds under administration. But that was not specifically the case for Netwealth.

Weathering the Storm

Over the March quarter, Netwealth saw funds under administration grow by 23% year on year. The platform did not see a net exit of funds, rather booked $3.5bn of net inflows. This was in line with prior consensus expectation. FUA was nonetheless hit by a -$1bn fall in market value due to noted volatility over the period, which was greater than expected.

Netwealth suffered limited revenue margin impact from recent market volatility, Morgan Stanley notes, given high levels of recurring revenue and diversified models for revenue (higher trading volumes and cash balances) and portfolios (multiple asset classes).

There was still some flight to safety apparent, but Netwealth allows investors to move into cash within its platform. The amount of FUA held as cash lifted to 5.8% by end-March compared to 5.5% at end-December.

That cash balance has continued to increase in April to date, during the tariff collapse and tariff pause rebound period, but so too has Netwealth's funds flow momentum continued, which points to transitions of funds to the "disruptor" platform continuing despite market volatility, Citi notes.

With revenue margin benefits from higher trading activity helping to offset higher cost growth, Jarden believes Netwealth will be able to sustain around 50% earnings margins into end-FY25 and beyond.

Management is certainly confident, extending its net flow guidance into FY26 for the first time, noting the June quarter, now underway in FY25, is seasonally strong for net fund flows.

Not Without Cost

Further reiteration of a focus on reinvestment in FY26 was also provided in the March quarter update with small increments additionally added to R&D capitalisation as Netwealth reduces reliance on third-party systems.

While FY25 is well understood to be a stronger year than usual for reinvestment, consensus had been "grappling", suggests Wilsons, with whether FY26 would be a normalisation period or Netwealth would continue to "double down".

The update provided a clear indication it is expected to be the latter, Wilsons believes, with Netwealth clearly confident in its medium-term outlook.

While management reiterated FY25 cost growth guidance (up 5% half on half in the second half), the update also mentioned "the level of investment will continue in FY26". In Cit's view, this flags upside risk to cost growth and the broker has upgraded its cost growth to 15% year on year in FY26, with earnings margins flat year on year at around 50%.

Citi sees current consensus for an earnings margin of 52% in FY26 as too high, which reflects downside to revenue (given market weakness) and slightly higher costs.