Morningstar’s analysts shift outlook for Platinum after mandate loss
We cut our Fair Value and revise our estimates for Platinum’s future earnings
Mentioned: Platinum Asset Management Ltd (PTM)
Platinum Asset Management PTM disappointed after announcing a redemption of $1.4 billion in mandated funds from an undisclosed institutional investor, highlighting the challenges faced by active asset managers lacking compelling performance, such as Platinum. The $1.4 billion loss represents 9% of Platinum’s current funds under management, or FUM, of $15.6 billion. At its peak in 2015, Platinum was managing almost $30 billion. This mandate loss combined with some other anticipated institutional account changes over the next few months, is expected to lead to an $18 million reduction in annual fee revenue.
Platinum concentrates on identifying unfashionable stocks with perceived strong growth prospects. It is not focused on asset allocation and pays little attention to its benchmarks. As a result, its portfolios often look little like—and returns often don’t resemble—their indexes. This is key to recent underperformance relative to peers and why a return to net inflows is challenging. Its aggregate investment performance lags at least 78% of its comparable peers over one-, three-, and five-year timeframes. This has been attributed to being underweight US tech stocks that have provided eye-watering returns to investors in the recent past. Partnered with this, the industry continues to see a shift of investors moving to passively managed investments.
After the announcement, shares plunged more than 20%. The stock is not far off its all time low of $1.01. It is considered fairly valued (at 2 April 2024) and is a three star stock.
Reflecting the worse-than-expected fund outflows and revenue reduction, Morningstar cuts the fair value estimate for no-moat Platinum by 20% to $1.00 per share. Product limitations make it difficult for Platinum to attract fund flows. As mentioned, Platinum’s benchmark-agnostic, contrarian investment style and performance deviate materially from global equity benchmarks, preventing its products from making up a large proportion of client portfolios, usually benchmark-aware funds seeking to beat the benchmark. Investors and financial advisers preference predictability or mandates that have a strong alignment to the investment objective they are trying to achieve. In most instances, this prohibits investment styles such as Platinum to make up a core holding in portfolios.
This difficulty to attract inflows in a meaningful way combined with the industry trend towards passive investment preferences means that we expect Platinum’s Funds Under Management (FUM) to continue declining.
We estimate their FUM decline to around $10 billion by fiscal 2028, from $17 billion in fiscal 2023, implying a loss of 10% per year. Our revised revenue from management and performance fees for fiscal 2024 is estimated to be $177 million, down from $203 million from the previous year, with an aggregate base fee margin of 1.01%, below its five-year average of 1.17%.
Regardless of whether investors are exposed to Platinum, the Australian market is overweight financials and asset managers. Trends including the shift of preference towards passively managed investments will impact investors with broad Australian market exposure. You're able to find a deep dive of the state of play and trends impacting the industry in the below Investing Compass episode.
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