The investment return outlook for Australia's big four banks may have divided commentators but there are other ASX-listed large-cap financial stocks worth watching.

Much to like at Magellan

Magellan Financial Group (ASX: MFG) is a successful Australia-based active international equity and infrastructure fund manager. Led by outspoken founder and CEO Hamish Douglass, Magellan’s funds have a strong track-record of long-term investment outperformance.

John Likos, a Morningstar director, equity research, anticipates in-flows for its funds and the growth assumptions for its wholesale assets under management will be "in the low single digits".

"Potential acquisitions present potential upside,” Likos says. “But similarly, our forecast assumption of an average return on assets of 5 per cent could be challenged by one or two underperforming periods."

Major earnings risks come from the need to maintain good investment returns and the relatively more volatile nature of large institutional mandates.

Despite these risks, Likos says there is much to like about Magellan, which carries a narrow moat rating, based on substantial intangible assets and moderate customer switching costs associated with a high-performing asset manager.

Among these intangibles are its brand, long-term performance and "entrenched domestic and international sales relationships".

“A strong brand, its ability to leverage off high switching costs, and the tailwind of a growing pool of self-managed superannuation fund assets to target are just three drivers," Likos says.

global stocks equities

Growth in overseas exposure by Aussie investors is a key tailwind for Magellan, Platinum

Increasing diversification into international assets by Australian investors, who are notoriously over-exposed to domestic assets, will boost attractive long-term industry dynamics, Likos says.

The stock is currently slightly undervalued, closing yesterday at $24.68, an 8.5 per cent discount to Morningstar's $27 fair value estimate.

Life after Kerr at Platinum

Another Australian-based international equities manager, which also built its reputation around a revered stockpicker – in this instance, co-founder Kerr Neilson – is Platinum Asset Management (ASX: PTM).

Platinum also boasts an impressive long-term track record and grew rapidly in the last bull market, which ended in 2007, according to Likos.

While Neilson has now stepped back, he's handed CEO responsibilities to his trusted lieutenant, Andrew Clifford, who also has decades of experience in the company.
Like Magellan, it has a four-star rating and carries a narrow moat rating.

Its fair value estimate was downgraded earlier this year, after underperformance in the second-half resulted in funds under management falling short of Morningstar's expected $28 billion.

"But despite the weak second half, our positive long-term view of FUM growth remains in place," Likos says.

Platinum closed yesterday at $5.50 and is trading around 15 per cent below Morningstar's FVE of $6.40.

Pendal’s strong balance sheet

Another financial stock to monitor is Pendal Group (ASX: PDL), which had a stronger-than-expected first half of 2018. Pendal is formerly known as BT Investment Management – majority-owned by Westpac, which now holds only a 10 per cent share in the renamed entity.

Pendal’s lift was driven by strong market performance and favourable currency movements – which were partially offset by net outflows of funds.

"Our forecast adjustments to revenue and costs largely cancel each other out, resulting in no change to our fair value estimate and 4-star rating," Likos notes in a recent update.

"Pendal Group continues to display a very strong balance sheet, supported by healthy free cash flow generation.”

The company holds a narrow economic moat, attributed to its long history, strong brand presence and broad range of products. Customer switching costs also provide a sustainable competitive advantage, Likos says.

Trading at $9.29 at last close, the stock is about 16 per cent below Morningstar's FVE.

Macquarie makes history

High-profile global financial business Macquarie Group (ASX: MQG) made history last week by appointing its female chief executive, Shemara Wikramanayake, who takes the reins from Nicholas Moore.

Senior banking analyst David Ellis hailed the moved and tips Macquarie, which carries a three-star, narrow-moat rating, to continue its strong run.

"Our positive view on Australia's largest global asset manager and investment bank is intact and at the current stock price, the stock is fairly valued, trading 6 per cent below our $130 fair value estimate,” Ellis says.

"We forecast impressive returns on equity around 17 per cent per year and an attractive dividend stream for the next five years at least.”

Perpetual revenue streams

Another three-star, narrow-moat financial stock to note is Perpetual Limited (ASX: PPT).
Despite some challenges, Morningstar analyst Chanaka Gunasekera believes the scale of its funds under management and advice business provide it with recurring revenue streams.
Gunasekera says Perpetual should benefit from continued growth in its private and trust segments and rising markets.

Perpetual closed yesterday at $43.69 a share – in line with Morningstar's FVE of $43.90.
"Our view is that its core investment division is suffering from the structural issues of industry super funds moving more asset-management in-house and a trend to more passive investment styles," Gunasekera says.

"We expect a key focus of incoming CEO and managing director, Rob Adams, will be to address the organic outflows.”

 

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Glenn Freeman is senior editor, Morningstar Australia.

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