Strat­egy: Greg Hoff­man Favourite global funds

Aus­tralians who want over­seas ex­po­sure in their port­fo­lios can get it sim­ply by buy­ing lo­cal listed fund man­agers

Money Magazine Australia - - CONTENTS - STORY GREG HOFF­MAN

You may have seen the ads ex­plain­ing how the Aussie share­mar­ket is only 2% of world mar­kets. Or re­alised that our share­mar­ket is heav­ily weighted to banks and re­sources gi­ants while hav­ing no ex­po­sure to the likes of Ap­ple, Dis­ney, Google (now Al­pha­bet on the NAS­DAQ), Nike and Sam­sung.

For many years Aus­tralian in­vestors had far too lit­tle ex­po­sure to in­ter­na­tional shares. But we’ve be­gun to get the mes­sage over the past five years or so and the amount in­vested in in­ter­na­tional share funds has in­creased. Yet many of us (my­self in­cluded) still don’t have enough ex­po­sure to in­ter­na­tional shares.

So the odds of this trend con­tin­u­ing seem good be­cause it’s un­der­pinned by sound logic. And this makes fund man­agers run­ning in­ter­na­tional funds wor­thy of con­sid­er­a­tion as in­vest­ments in their own right. They’re sell­ing a prod­uct with in­creas­ing de­mand, which is of­ten a good place to start.

Let’s look at four stocks listed on the ASX that are ben­e­fit­ing from this trend.

Plat­inum As­set Man­age­ment

Plat­inum (ASX: PTM) was the pi­o­neer in the field of Aus­tralian fund man­agers spe­cial­is­ing in in­ter­na­tional in­vest­ing. It has a large con­tin­gent of re­tail clients (or­di­nary peo­ple like you and me, rather than big cor­po­rates) and has in­creased its funds un­der man­age­ment by 40% over the past five years from $19.8 bil­lion to $27.7 bil­lion.

Within the in­dus­try, funds from re­tail clients are gen­er­ally con­sid­ered “higher qual­ity” than funds from larger clients. That’s be­cause re­tail clients tend to be more loyal over time. They also usu­ally aren’t in a po­si­tion to ne­go­ti­ate a deep dis­count on fees, so are typ­i­cally more prof­itable for the fund man­ager per dol­lar of in­vest­ment.

I re­cently added some

Plat­inum shares to my su­per fund at $5.36 each. The stock is down more than 35% since its high of $8.72 in Fe­bru­ary.

The first fac­tor be­hind the drop was the an­nounce­ment that Kerr Neil­son, the high-pro­file bil­lion­aire founder, was hand­ing the reins to long-time lieu­tenant An­drew Clif­ford. More re­cently bro­ker Mor­gan Stan­ley down­graded its profit fore­casts on the view that the com­pany’s soon-to-be-an­nounced 2018 profit will be a bumper and there­fore hard to match over the fol­low­ing year or two.

I have no idea what the next cou­ple of years might hold but I am con­fi­dent that Plat­inum is likely to per­form well for its clients over the long term un­der Clif­ford. And if it does that, then its funds un­der man­age­ment should con­tinue to grow over the next decade and that should lead to higher prof­its. The path is un­likely to be smooth but that’s fine for long-term in­vestors who can ride out the bumps.

Mag­el­lan Fi­nan­cial Group

Mag­el­lan (MFG) has made even faster progress than Plat­inum. To­day it man­ages around $19 bil­lion for re­tail clients, up more than 300% over the $4.5 bil­lion as at June 30, 2013. Over­all funds un­der man­age­ment to­talled $69.5 bil­lion at June 30, with more than $52 bil­lion of that be­ing “global eq­ui­ties”, though much of that comes from

larger in­ter­na­tional clients. In just 12 years, Mag­el­lan’s man­age­ment team has built a busi­ness that is the envy of the in­dus­try. Con­trast that with stal­wart Per­pet­ual, which has been in the game for 50 years but amassed less than half of Mag­el­lan’s funds un­der man­age­ment.

The com­pany’s share price is above $23 as I write and I think to­day’s buyer is likely to earn a re­spectable re­turn over the com­ing decade from that level (per­haps 7% to 12% a year). I don’t cur­rently own any shares in it but closer to $20 I’d be rather tempted.

Pin­na­cle In­vest­ment Man­age­ment

If Mag­el­lan has set a record for what can be achieved in 12 years, then An­tipodes Part­ners may well have set the record for a shorter time frame. Formed just three years ago by a group of staff break­ing away from Plat­inum As­set Man­age­ment, An­tipodes now boasts more than $7 bil­lion in funds un­der man­age­ment fo­cused on in­ter­na­tional shares.

It’s one of the most as­ton­ish­ing suc­cess sto­ries in the Aus­tralian funds man­age­ment in­dus­try and is par­towned by Pin­na­cle In­vest­ment Man­age­ment (ASX: PNI). I’ve been a long-term fan of Pin­na­cle and have men­tioned it in sev­eral pre­vi­ous col­umns. Its suc­cess­ful man­age­ment team has ex­e­cuted bril­liantly on its strat­egy of in­cu­bat­ing in­de­pen­dent fund man­agers, pro­vid­ing them with fi­nan­cial and mar­ket­ing sup­port.

Pin­na­cle has ex­po­sure to nine “af­fil­i­ates”, in­clud­ing An­tipodes, a num­ber that is likely to grow over time. Each has a dif­fer­ent fo­cus, so this is not a “pure play” on the in­ter­na­tional in­vest­ing theme. And while the share price is un­likely to re­peat its stel­lar run of the past five years (from less than 30¢ to more than $5), I think a dou­ble or triple is quite fea­si­ble over the next decade. Add in some div­i­dends and that would be­come a tidy re­turn.

Pen­gana Cap­i­tal

Pen­gana (PCG) joined the ASX in 2017 af­ter sub­sum­ing com­peti­tor Hunter Hall In­ter­na­tional. It’s the one I’m least fa­mil­iar with of the four but has around $3.5 bil­lion in funds un­der man­age­ment with about a quar­ter of that in in­ter­na­tional shares.

To my eye, the com­pany has a fat cost base and a large amount of profit seems to go to staff. That all means its profit mar­gins are way lower than those of Plat­inum and Mag­el­lan, ex­ac­er­bated by its smaller size. At this stage it doesn’t ap­peal to me but I’ll keep an eye on it over the com­ing years to see how things evolve and whether I may have missed some valu­able piece of the puz­zle.

Each of these fund man­agers has ben­e­fited from the trend to­wards in­creased own­er­ship of in­ter­na­tional shares by Aus­tralians. And, as a group, they’re likely to con­tinue to ben­e­fit. But any in­di­vid­ual funds man­age­ment busi­nesses can be risky. Just ask share­hold­ers of the trou­bled Blue Sky or even Hunter Hall be­fore last year’s deal with Pen­gana.

Shot­gun or ri­fle?

The path is un­likely to be smooth but that’s fine for long-term in­vestors

So for those of us in­ter­ested in gain­ing ex­po­sure to the over­all trend via these listed fund man­agers, a choice must be made be­tween two ap­proaches. The first is a “shot­gun” ap­proach, in which you’d buy a lit­tle of each stock. That di­ver­sity would pro­tect against any sin­gle busi­ness ex­pe­ri­enc­ing dif­fi­cul­ties, though not against an over­all in­dus­try down­turn. And the funds man­age­ment in­dus­try is prone to down­turns when mar­kets go through their in­evitable bear­ish phases.

Al­ter­na­tively, you could take a “ri­fle shot” ap­proach and pick a se­lect num­ber from the larger group. For me that is cur­rently two stocks, Plat­inum and Pin­na­cle. But there is a case for adding Mag­el­lan to the bas­ket for the sake of di­ver­sity.

From a risk per­spec­tive, it’s quite pos­si­ble that these stocks could fall by 50%, so it’s im­por­tant not to bet the farm on this theme. An­other GFC, or a pro­longed bear mar­ket, could sharply im­pact their prof­itabil­ity. But re­ward doesn’t come with­out risk and my three favoured stocks of­fer a good mea­sure of both.

Greg Hoff­man is an in­de­pen­dent fi­nan­cial ed­u­ca­tor, com­men­ta­tor and in­vestor. He is also non-ex­ec­u­tive chair­man of For­ager Funds Man­age­ment (not in­volved in For­ager’s in­vest­ment process).

Dis­clo­sure: Pri­vate port­fo­lios man­aged by Greg Hoff­man own shares in Pin­na­cle In­vest­ment Man­age­ment and Plat­inum As­set Man­age­ment.

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