Perpetual’s new boss Bernard Reilly and his mountain of ‘serious challenges’

A top fund manager says he ‘wouldn’t want to be doing that job’, as Perpetual’s new CEO Bernard Reilly prepares to take the reins on Monday as the fund giant slides to a loss.

Perpetual’s incoming CEO Bernard Reilly. Picture: Sarah Keayes

In a few days, the once-great Perpetual will have a new boss at the helm.

Bernard Reilly’s task will be exponential.

“Good luck to him – I would not want to be doing that job,” says one of Australia’s most closely watched fund managers, who did not want to be named for this article. “The business has serious challenges turning around its outflows and holding onto its key staff.”

Indeed, Mr Reilly faces a mammoth task.

Perpetual is known for nurturing many of the nation’s very best fund managers over its 138-year gloried history. But then four years ago, when facing the existential threat born by all active investors losing funds to cheaper exchange-traded competitors, it went on a board-endorsed takeover frenzy that ratcheted up its borrowings and failed to stop its outflows of funds.

What a mess.

Now Rob Adam’s six-year span at Perpetual is coming to a sudden end and chairman Tony D’Aloisio won’t stand for re-election.

And less than two weeks after announcing the largely-unknown Mr Reilly’s appointment, the newcomer will walk into the Perpetual head office in Angel Place, Sydney as the boss. His job will be to stop key investment staff, clients, and their dollars from walking out the opposite way.

He inherits a mountain of challenges. The company on Thursday swung to a loss, of $472.2m after earlier in the week taking a non-cash hit of $547m relating to “greater than expected net outflows” at JO Hambro and TSW, two of the brands Perpetual acquired as part of its $2bn-plus takeover of rival Pendal.

The outflows at Hambro no doubt are connected to the departure in April of its UK Dynamic manager Alex Savvides. As they say in funds management, your key assets swipe out when they leave the office each night. And it means takeovers in the industry rarely stack up.

In June, Perpetual said assets under management had dropped five per cent to $215bn and the company saw outflows of $12bn during the year ended June 30.

The company’s fund outflows come even as it spent billions of dollars snapping up rivals over four years, hoping to achieve greater scale and higher management fees. What it managed instead was a shift in bank balance from $81m of cash to net debt of circa $600m.

Its takeovers include US-based global equities house Barrow Hanley and ESG investor Trillium, as well as its most recent and highly-questioned purchase of Australian listed rival Pendal.

It’s the kind of risky corporate action famous former equity bosses Anton Tagliaferro, Peter Morgan, and John Sevior would have fought against; and exactly what the most recently departed equities boss, Paul Skamvougeras, did fight. Mr Skamvougeras left after voicing his extreme dissatisfaction with the Pendal takeover.

For Mr Reilly, This challenge will likely be tougher than any other in his corporate life.

The Baulkam Hills-raised incoming chief executive ran Australian Retirement Trust until stepping down from the $300bn industry super fund earlier this year. Before that, he had a 24-year career at State Street Global Advisors and ran the US firm’s Asia Pacific business.

Things were different then, though.

Nowadays, active fund managers across the globe are struggling to work out how to remain viable when passive fund managers, usually in the form of ETFs, charge significantly fewer fees and often outperform.

As one of his former colleagues at State Street pointed out, not only have the market dynamics changed toward algorithmic trading, “it’s a very different thing running a listed company.” Still, that person, who declined to be named, says he is “an experienced team player.”

Australian Retirement Trust chief investment officer Ian Patrick, who has known Mr Reilly for 20 years and worked for him for four, says he is up to the task.

“He understands the asset management space really well and his experience is deep, which gives him the ability to identify, coach, guide and prioritise,” said Mr Patrick.

The CIO said his former boss is not a “roll your sleeves up and get your hands and elbows dirty” and is instead the kind of person to coach and delegate appropriately.

“Bernard is a very warm and engaging person who as the CEO really got into the soul of the organisation,” said Mr Patrick of his time at Australian Retirement Trust.

One of Mr Reilly’s first jobs will be making sure Vince Pezzullo, who took over the equities role, remains happy, along with the rest of his team.

Mr Reilly will probably be taking on a dramatically slimmed down business. Perpetual has an agreement in place to sell its name and corporate trust and wealth businesses, to private equity giant KKR for $2.175bn.

The deal is conditional on a ruling by the Australian Taxation Office, expected shortly.

But will it be enough?

Morningstar equities analyst Shaun Ler said he saw a “zero-sum world for traditional active managers.”

In a recent research report, Mr Ler said most of the Australian active listed fund managers “delivered rather average peer-relative returns,” adding that any “business wins are likely to be at the expense of close peers rather than structural gains from low-cost alternatives.”

Time will tell if the soon-to-be rebadged Perpetual will manage to be one of those winners once more.

Originally published as Perpetual’s new boss Bernard Reilly and his mountain of ‘serious challenges’