Perpetual positive despite 29pc profit slump

The investment house expects coming years to favour active managers, after COVID’s impact helped drag annual profit down 29pc.

Perpetual CEO Rob Adams. Picture: Supplied

A weight of money will shift to active managers in the coming years as COVID-19 stunts economic growth around the globe, paving the way for “a stockpickers world”, according to Perpetual chief executive Rob Adams.

Once a vaccine to protect against the virus is found, the economic recovery “will be sharp and swift”, but until then the investing environment will be difficult, Mr Adams told The Australian.

The valuations afforded to certain ‘Covid winners’, meanwhile, will come under question at some point in the near future, he predicted.

“It feels like we’re likely to be in an environment that’s going to be better suited to value investing. And rather than just buying the whole market in a passive way through an index fund, where you’re buying the good, the bad, and the ugly, I think we’re entering into an environment when stock picking is going to come to the fore.

“And so your active management, I suspect over the next few years, will come back into vogue and we’ll see a weight of money shift towards active managers, if they outperform. A tougher economic environment where growth is less certain is better suited to active management,” he said.

Mr Adams was speaking after the wealth manager posted a 29 per cent slide in net profit for the year, as revenue dropped on lower funds under management, an investment hit from COVID-19 and its investment in growth initiatives.

Net profit for the 12 months through June slumped to $82m, from $116m the year prior, while underlying profit fell 19 per cent to $93.5m. Revenue declined 5 per cent to $489.2m.

Net outflows topped $2.6bn over the year, driven by funds flowing out of its Australian equities capabilities due to legacy book roll-off as well as its underperformance, Mr Adams said.

“We’ve also in recent years seen a big trend in the big superfunds managing more money in-house rather than giving it to third party managers like ourselves. So there are some headwinds that make it pretty tough. But ultimately, when we can generate sustained outperformance that puts us in the strongest position to slow outflows,” he said.

For the full year, Perpetual Investments generated a profit before tax of $55.4m, down 31 per cent on the prior corresponding period.

Its active investment approach saw some of its funds generate returns in excess of their benchmarks through the February and March correction, Mr Adams said.

Following the acquisition of Boston-based ESG investor Trillium, completed on June 30, and the planned acquisition of a 75 per cent interest in US-based asset manager Barrow Hanley, Mr Adams said he was still on the lookout for further bolt-on acquisitions.

“We’re looking at a couple of bolt-on opportunities right now: one for Perpetual Private and one for Perpetual Corporate Trust. I think, pretty much since I’ve been CEO, we’ve had an active M&A pipeline.” Mr Adams has been in the top job at Perpetual for just under two years.

“I think you need to be opportunistic. I think we’ve still got a very strong balance sheet, I think we’ve got good cash flow generation out of our business, I’m keen for us to have a pretty regular program of investing in the business, as long as the right opportunities are there and that our return hurdles can be met.”

For the year, Perpetual Private posted profit before tax of $30.1m, down 27 per cent, while Perpetual Corporate Trust posted a profit before tax of $55.2m, a 16 per cent lift on 2019, driven by growth from existing clients and new client mandates across its business segments.

Perpetual announced a 50c per share fully-franked final dividend, a 60 per cent drop on last year’s final payout. That brought the full-year dividend to $1.55, representing a net profit payout ratio of 94 per cent. The full-year dividend was down 38 per cent on 2019.

The dividend was a miss versus consensus, with Macquarie analysts warning the current 90 per cent payout ratio was at risk.

“The payout ratio range of underlying profit after tax has yet to be determined, although we do see some downside risk to the current 90 per cent payout ratio in our forecasts,” the analysts told clients.

From this year, dividends will be paid on a revised underlying profit after tax metric to reflect the changes to the group’s operating cashflows from both existing and future growth opportunities, Perpetual said.

Perpetual shares finished up 3 per cent at $31.90.