Strategy: Greg Hoffman Favourite global funds
Australians who want overseas exposure in their portfolios can get it simply by buying local listed fund managers
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 (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.