Perpetual boss says volatility can help stockpickers as merger closes

Perpetual chief executive Rob Adams has argued more volatility on financial markets should support active managers in their contest with passive funds, as the fund manager starts a new chapter through its merger with Pendal.

Perpetual, one of Australia’s oldest wealth managers, on Monday completed a deal to buy rival Pendal, a transaction that has faced scepticism from some in the financial markets.

The deal will create a company managing close $200 billion in assets around the world, but it has been controversial with some investors, who worry it will not create sufficient value for Perpetual shareholders.

Perpetual chief executive Rob Adams.Credit: Brook Mitchell

In an interview, Adams acknowledged parts of the business had work to do in lifting their performance. But he reiterated that overall, market volatility - which some expect will continue as interest rates rise - should help active managers.

“I think we’re in for what will be a halcyon period for active asset management. And I think, as a combined group, with the skills we have across the brands that we have, I think we’re going to be really well-placed to benefit from active winning out over index over time, by sheer performance and adding value,” he said.

Perpetual and Pendal are joining forces at a time when active managers’ revenues have been pressured by investors seeking lower fees amid stiff competition from lower-cost index funds, which do not attempt to beat the market.

A market update from Perpetual last week showed total assets under management had grown 4 per cent in December quarter, mainly because market gains, and that its Australian equities and its US business Barrow Hanley had both outperformed their benchmarks over three years. At the same time, however, the results also showed $1.2 billion in net outflows in the quarter.

Morningstar analyst Shaun Ler said although Perpetual’s latest figures showed strong investment performance, broader data did not show that active managers across the industry were beating their benchmarks during times of volatility. Instead, some managers outperformed and others did not.

Ler said there had been considerable scepticism in the market towards the Pendal deal because of a concern the merged company could struggle to keep its portfolio managers, after the exit of Perpetual’s former head of equities Paul Skamvougeras in November.

“It’s mainly because people are just not sure whether or not there will be further staff departures from the company,” Ler said.

Adams said Perpetual’s US equities business had endured a tougher period and the company still had “a job to do” in this part of the market, and he conceded parts of Pendal also needed to improve their fund flows. But despite these challenges, Adams maintained the merger would give the combined group greater capacity to invest.

“We certainly feel that by bringing these two organisations together, we’re in a stronger position to invest in our distribution, invest in our client relationships, and look towards a steady improvement in that net flow position over time,” Adams said.

Citi analyst Nigel Pittaway said it was encouraging that Perpetual’s Australian equities strategies and Barrow Hanley were outperforming, but strong performance was no longer enough to attract “meaningful” flows. Pittaway, who has “buy” on Perpetual shares, said he believed Perpetual shares were “reasonably inexpensive,” and cost synergies from the merger were still to come.

Perpetual shares gained 2 per cent to $26.73.