The Pendal Group Ltd (ASX: PDL) share price is getting crunched, down 8% at the time of writing, to make it the worst performer in the ASX 200 (INDEXASX: XJO) today.
Pendal Group is the new BT Investment Management. Having moved away from Westpac Banking Group (ASX: WBC), Pendal is now one of Australia’s largest fund managers, with more than $100 billion invested across its business.
What’s Going On?
On Friday morning, Pendal announced that it suffered a $1.2 billion outflow of investments within its JOHCM subsidiary but it enjoyed a $1.4 billion inflow at Pendal Australia.
Funds management businesses typically charge base management fees (e.g. 1% of all money invested) plus a performance fee, which varies depending on investment returns. Naturally, the amount of money Pendal is investing for its clients directly impacts the amount of revenue the business will earn. In other words, less FUM = less revenue.
While the total amount of funds under management (FUM) will ebb-and-flow from one year to the next, a negative takaway from Pendal’s announcement on Friday was the news that Westpac plans to pull another $1.5 billion of client money from the firm in April.
The ‘effective’ fee on the $1.5 billion was around 0.31% per year, or just over $4 million in fees per year.
Countering the negative news, Pendal said its Pendal Australia business had earned performance fees of $2 million as of March 31st, 2019. However, the final performance fee income will not be known until June 30th.
Funds management businesses like Pendal can be extremely lucrative investments for ASX shareholders — just ask shareholders in Platinum Investment Limited (ASX: PTM) and Magellan Financial Group Ltd (ASX: MFG).
However, in my experience, it’s rare to find a funds management business — especially in 2019 — that earns a very reliable stream of fee revenue and cash flow, and has its share price trading at a reasonable valuation. Personally, I would prefer to shares in these types of businesses when financial markets are on their knees — and their fees have fallen.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.