Perpetual says overhaul will arrest profit slide

Investment house Perpetual says it may no longer rely solely on a value-based approach to investment decisions.

Perpetual CEO Rob Adams.

Investment house Perpetual has capitulated to the pressures of a low-interest rate environment, as it explores a move into growth and momentum investing as part of its expansion plans under chief executive Rob Adams.

Speaking to The Australian on Thursday after handing down the group’s half-year result, Mr Adams said he no longer wanted the veteran investment shop to be restricted to a value-only approach.

“We should be open to other investment styles as we look to acquire new businesses or bring on board new investment teams, whether that’s growth or momentum-led, or growth at a reasonable price or any other type of investment style. As we seek to expand our investment capabilities, I would prefer us to be more open-minded.”

Perpetual’s decision marks a major shift for the asset manager, which has for decades been synonymous with value. Value investing has been out of favour for a number of years as returns from momentum investing have rocketed in the ultra low-rate era.

It comes as veteran stock picker and former Perpetual moneymaker Peter Morgan has warned of the risks posed by “chasing flavour of the month” as he revealed he recently sold out of the asset manager in part because of concerns he had with its expansion plans.

Reassuring that Perpetual wasn’t abandoning its value style, Mr Adams said there would be no change to the investment approach of pre-existing Perpetual teams. Instead, the potential for alternative investment styles would come through bolt-on acquisitions or bringing in new teams.

“We are still deeply committed to the value approach for our pre-existing teams. That’s not going to change. But as we look to bring new teams on, whether it be through acquisition or team lift out, we won’t restrict ourselves to value only. There are plenty of other valid, proven investment styles that we should consider owning,” he said.

Mr Morgan, who joined Perpetual in 1990 and rose to become its head of equities before quitting the asset manager in 2002, questioned the timing of the expansion strategy and raised concerns about moving too far away from Perpetual’s origins.

“They’re obviously trying to diversify away from what built the business and what was the core business line … But the prices for a growth manager are not going to be cheap … if you’re going to go into a market a buy something it becomes fraught with acquisition risk. It’s not a riskless strategy if you’re not building it from the bottom up,” he told The Australian.

Perpetual’s success was due in large part to its in-house teams, he added.

“I’m not just talking about myself, I’m talking about others who have come and gone. It’s been very much built around the people; it hasn’t been built around making acquisitions and it does raise the risk profile, particularly in an environment where asset prices around the world are not necessarily cheap.

“The due diligence has to be sound and they’re hopefully not making an acquisition for the sake of it,” he said.

Dismissing concerns about inflated asset prices, Mr Adams said he wasn’t feeling any pricing pressure.

“When you find the right sort of opportunities, where there’s a real alignment of interests, value tends to look after itself,” he remarked.

But Mr Morgan, who recently sold out of Perpetual in part due to “acquisition risk”, raised concerns about the possibility that the value manager was panic buying.

“Things go through cycles. I was in the market in ‘87, ‘91 and 2000. You can panic at the bottom and I hope they’re not doing that,” he said.

“Perpetual stumbled around for 20 years trying to diversify away from its domestic equity base. It hasn’t really worked. They’ve got to start thinking about why it hasn’t worked rather than just trying to force the change.”

Perpetual last month announced the acquisition of Boston-based ESG investment manager Trillium Asset Management, marking the beginning of its global expansion strategy.

The $54m purchase of the pioneer in ESG investing will boost Perpetual’s assets under management by $5.5bn, bringing its total assets under management to around $31bn, and allow it to increase its exposure to the increasingly popular ESG sector.

The group is looking offshore for more bolt-on acquisitions as a means of diversifying away from its mostly Australian client base, Mr Adams said.

“Our client base is almost exclusively Australian. As we seek to do new things I’m keen to expand our footprint, I’m keen to get diversity of our client type and I’m keen to get diversity of our investment style.”

Over the long term, in 10 years, it was possible the group’s ex-Australian assets could be larger than its Australian assets, perhaps even double the size, he said.

For the six months through December, Perpetual posted a net profit of $51.6m, down 14 per cent from $60.2m in the prior corresponding half, as revenue rose less than 1 per cent to $253.5m.

Its shares surged on the result, jumping 11 per cent to close at $47.27 as investors looked to its growth potential.

“I got that [sell] call wrong at the moment, didn’t I,” Mr Morgan said of the sharp share price rise.

Bell Potter’s Lafitani Sotiriou upgraded the investment house to “buy” from “hold” on the back of its emerging growth opportunities, and that headwinds were “more fully-factored in and expected to lessen over the years ahead”. He also raised his price target 25 per cent to $51.20.

Perpetual’s costs rose in the half on the year prior, climbing 4 per cent to $173.8m as it pursued its expansion strategy.

Its average funds under management fell 11 per cent to $26.3m, with higher equity markets failing to offset the net $1.5bn that flowed out of its funds, it said.

Perpetual Investments’ profit before tax fell 20 per cent to $37.2m on the back of the fund outflows, and while pre-tax profit at its Perpetual Private financial advice business dropped 23 per cent to $17.4m following its acquisition of risk advisory firm Priority Life.

Perpetual will pay an interim dividend of $1.05 per share, down from $1.25 in first half of the year prior.