As we outlined in this recent article, several asset managers have seen their moat ratings downgraded in recent years amid intense competitive pressure.

This trend has continued into 2025, as Morningstar Australia’s Shaun Ler opted to downgrade Perpetual (ASX: PPT) from a Narrow Moat rating to No Moat.

In this article, we’ll look at Ler’s rationale for the moat downgrade and why it isn’t all doom and gloom for the firm.

Headwinds in asset management detract from moaty segments

Perpetual has three business units: asset management, private wealth advisory, and corporate trust services.

Shaun estimates that asset management will provide around 57% of the group’s long-term adjusted profits, private wealth advice 17% and corporate trust services around 26%.

Shaun continues to think that Perpetual’s corporate trust business would warrant a Wide Moat rating on a stand-alone basis. This is partly due to Perpetual’s strong, trusted brand that has been established by serving Australia’s financial industry for several decades.

Perpetual’s corporate trust business also has unmatched scale compared to other players in the Australian market, which gives rise to cost advantages versus competitors. This is because many of this business’s costs, such as technology, are fixed in nature and can be fractionalised over a much larger base of funds under administration and revenue.

Shaun previously thought the strength of the corporate trust segment, in addition to traces of intangible assets and switching costs in the private wealth arm, were enough to support a Narrow Moat rating for Perpetual as a whole.

However, increasing headwinds in the asset management segment have seen Shaun’s conviction in this opinion fade. The big problem here for Perpetual has been net persistent net outflows that are at odds with the prior moat rating.

In the year to December 2024, Ler says that all of Perpetual’s asset management brands except Pendal and Perpetual Asset Management saw more funds leave its products than flow in. Weaker fund performance clouds the outlook here even further, as Perpetual has slid from 89% of its strategies outperforming their benchmark over a three-year period in 2022, to just 63% by the end of 2024.

Despite having strong brand recognition and a broad product offering at first glance, Ler thinks that Perpetual’s asset management business is poorly positioned to retain assets across market cycles. More specifically, he is concerned that many of Perpetual’s offerings appear rather similar to each other.

This limits the ability to cross sell clients on different strategies and also increases the risk of several funds underperforming at the same time. Overall, Ler sees too much potential for weak returns in the asset management business to dilute the company’s returns on a group basis.

Not all doom and gloom

While Ler thinks it likely that Perpetual will continue to experience net outflows and fee compression in its asset management business, he actually expects the company’s funds under management to grow over his forecast period.

This is primarily because he thinks outflows could be offset by the compounding of remaining investor funds. Shaun also sees several potential positives that he thinks investors are missing.

For one, investors could be underestimating the potential for cost-cutting to support margins in the asset management business. Perpetual’s private wealth arm also looks well positioned to take market share in Australia’s undersupplied financial advice industry, although this business is currently up for sale.

Shaun sees KKR’s termination of its deal to buy the corporate trust services business as a positive, despite the announcement causing Perpetual’s shares to fall in February. Shaun did not think the proposed terms were attractive and its continued presence adds more stability to Perpetual’s overall earnings outlook.

With all that in mind, Shaun thinks that Perpetual shares continued to offer decent value at recent prices of around $17.50, albeit with a much lower margin of safety now that he has reduced his Fair Value estimate from $24.50 to $19.50.

Perpetual Limited

  • Moat rating: No Moat
  • Fair Value estimate: $19.50
  • Share price April 10: $17.50

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