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2 non-bank financial stocks worth a look

Glenn Freeman  |  13 Jul 2017Text size  Decrease  Increase  |  

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Active funds have copped a lot of flak, as ETF inflows continue to accelerate, but these two narrow-moat-rated ASX-listed global asset managers have held up well.


The long-running debate over the merits of active funds management versus index investing using passive vehicles such as exchange-traded funds (ETFs) is somewhat misdirected. The debate is really about fees, turnover of assets, and timing.

While the likes of BetaShares, VanEck, and State Street highlight figures that show ETFs outperforming, matching, or only marginally underperforming more expensive active funds over the medium term "a lot of people get the wrong idea, that you're one or the other. For a start, you can use passive for part of your portfolio and you can be active in other parts," says industry consultant Stephen Van Eyk.

"A lot of people don't realise when they look at statistics saying, 'oh, active doesn't add value over the long term' that there are five- to six-year periods where it's true, where there's no alpha to be added, and that's usually when market is really roaring along.

"However, in a market like what we've had over the last few years, where market performance is pretty volatile ... there have been some big opportunities for active management," he says.

Global asset manager Magellan Financial Group (ASX: MFG) has recognised some of these opportunities and capitalised on them. Headed by high-profile co-founder and CEO, Hamish Douglass, "its wholly-owned subsidiary Magellan Asset Management has had considerable success in increasing institutional funds under management (FUM) owing to a combination of a highly regarded investment management team; a long-term track record of investment outperformance; a sought-after investment strategy; and strong distribution capability," says Morningstar equity analyst Ravi Reddy.

Morningstar's positive earnings outlook for Magellan--which has a market cap of $4.59 billion--stems from its long-term investment track record and specialist global equities offerings.

"This positions Magellan to benefit from the tailwind of Australia's growing superannuation pool and expected increased flows being directed into international equities," Reddy says.

Its growth in the fiscal year to the end of June 2017 was driven by a combination of $4 billion in net inflows and $6 billion in positive market movements. Over this period, group FUM has increased by just under 25 per cent, to $50.6 billion from $40.5 billion, "ahead of our forecast of 20 per cent growth".

This strong performance carried across both retail and institutional segments, with FUM up 25.9 per cent and 24.5 per cent, respectively.

"We like Magellan's long-term, high-quality stock-selection methodology, which is very similar to Morningstar's philosophy and approach," says Reddy, though he notes that its strategy of focusing on predominantly US mega-cap stocks "has yet to be fully tested through the investment cycle".

Platinum Asset Management (ASX: PTM) is another successful Australian fund manager. Like Magellan, it specialises in international equities, though they follow quite different investment processes. In the last couple of years, Platinum has heavily favoured companies in the Asian region, especially China and India, over those in the US.

Under the leadership of high-profile co-founder and chief executive, Kerr Neilson, Platinum has "a strong, distinctive investment culture which adds to its considerable brand recognition in the retail investor market," Reddy says.

He believes the manager's global equities offering, strong brand, and long track record leave it in a good position to benefit from Australia's increasing retirement savings allocation to global markets over the long term.

Platinum's FUM in fiscal 2017 was relatively flat in comparison with the prior year--up just 2.6 per cent to $22.7 billion, or $23.8 billion when net distributions to investors are excluded, on a six-month basis. However, over the past 12 months, its largest fund, the Platinum International Fund, outperformed its benchmark by 6 per cent.

While its second-largest fund, the Asia Fund, underperformed by 3.3 per cent over the year, Reddy highlights Platinum's absolute return focus: "To this end, both these funds performed strongly on an absolute return basis, returning 21.3 per cent and 19.7 per cent over the past 12 months."

He emphasises Platinum's "enviable long-term outperformance track record and strong brand recognition" which enable it to sustain relatively high management fees--and its "highly regarded management team".

"A track record of investment outperformance, stretching back over 20 years, bode well for future inflows," Reddy says.

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Glenn Freeman is a Morningstar senior editor.

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