Perpetual Limited (ASX: PPT) shares are having a stinker today, down nearly 6%, despite the S&P/ASX 200 (INDEXASX: XJO) trading mostly sideways.
Perpetual is an Australian funds management business. It acts as the investment manager for a number of strategies but it also provides financial advice and trustee services. As of June 30 2019, the business had $27.1 billion of funds under management.
In the funds management space, Perpetual competes against companies such as Magellan Financial Group Ltd (ASX: MFG) and Platinum Investment Management Limited (ASX: PTM). Magellan has been the most successful over the past five years.
If you need to brush up on what a managed fund is, consider watching this video:
Why Perpetual Shares Are Having A Stinker
In an ASX statement yesterday, Perpetual revealed that its funds under management or FUM was $27.1 billion at June 30th, 2019. That’s $0.3 billion lower than prior quarter because the company suffered $1.1 billion of net outflows from its funds.
Fund managers typically charge a base management fee (e.g. 1% per year) plus performance fees for good performance (e.g. 10% of performance better than the market average return). These percentages are based on the total amount of FUM which investors have entrusted with them. Meaning, less FUM equals less fee revenue for Perpetual’s business.
While Perpetual paid a distribution/dividend to investors of $0.3 billion and suffered $1.1 billion of outflows, mostly within its Australian shares strategies, the value of its investments rose $1.1 billion. Hence, the net drop in FUM for the quarter was $0.3 billion.
The problem for Perpetual is that it keeps losing clients. If you go back to to June 30 2018 Perpetual had $30.8 billion invested on behalf of clients. Meaning, over the past year — when the Australian and most global share markets have risen — Perpetual’s FUM has fallen.
Where’s The Money Going?
As Best ETFs reported last week, there is now $50 billion invested in Australian ETFs, up from $40 billion less than a year ago. If active fund managers cannot outperform low-cost index funds, it seems clients/investors are getting less patient. Another factor to consider is the investment performance of its peer group.
In the past year, Magellan’s FUM has risen from $69.5 billion to $86.7 billion as its core global shares and infrastructure investment strategies performed well. In other words, Magellan added $17 billion with a combination of new client money and good performance. Platinum’s FUM has fallen from $25.7 billion at June 2018 to $24.8 billion this year.
Are investors chasing returns (again) or is it something else?
Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.