Perpetual seeking investors for $1bn activist fund

Perpetual is attempting to launch a $1bn activist fund as chief executive Rob Adams faces falling funds under management and higher-than-expected costs from the $2.5bn Pendal takeover.

Perpetual chief executive Rob Adams. Picture: Nikki Short

Perpetual is seeking to raise as much as $1bn for a new activist shareholder fund as it seeks to parlay its history of speaking out on shareholder matters into a new money-making venture while outflows continue across all six of its investment divisions.

The Australian understands the funds management giant has spoken to a number of industry funds to try to find a seed investor for the yet-to-be-named fund, but has not yet succeeded.

The move comes as Perpetual desperately tries to deliver on promises it made when it paid $2.5bn for rival Pendal.

Instead of the scale promised from the takeover, the firm has seen outflows across all six of its funds – even as some of them have strongly outperformed – and a surge in costs related to the merger rather than the promised synergies.

Active managers like Perpetual are struggling to attract new dollars and retain existing investors because of a growing trend towards lower-cost and often better-performing index funds. This trend is being accelerated by the cost of living crisis and higher interest rates.

Perpetual’s attempt to start a $1bn activist fund will see it come up against the $1.5bn L1 Catalyst Fund and HMC Capital, run by David Di Pilla.

In theory, the move to start an activist fund should play to Perpetual’s strengths; it has spoken out to force changes at Tabcorp, Crown Resorts, Brambles, Boral and Iluka when its funds were run by former head of equities Paul Skamvougeras. The new fund is being pitched by new head of equities, Vince Pezzullo.

The takeover of Pendal should have allowed it to dilute its management and investment costs across a higher level of funds under management (FUM), but the opposite has occurred.

Last month, Perpetual announced FUM net outflows of $300m for Barrow Hanley, $2.3bn for JO Hambro, $1.2bn for Pendal, $400m for Perpetual, $100m for Trillium, and $900m at TSW. That led to a worse than expected total outflows of $5.1bn even as 79 per cent of its funds outperformed their benchmarks on a three-year basis.

While some of these outflows can fairly be attributed to general market trends, this is not the case for the worst performer, JO Hambro, whose Global Select fund was already under pressure before Perpetual purchased it as part of the Pendal takeover.

In the last calendar year the Global Select fund fell 33 per cent compared with a fall of 18 per cent for the benchmark, and so far this year the fund is up 6.4 per cent compared with a 17.5 per cent for the benchmark.

Perpetual will release its full-year results on Thursday. After last month’s FUM announcement a number of analysts have downgraded their forecasts.

MST Financial analyst Lafitani Sotiriou said in a research note that he now expected earnings per share to be 2.3 per cent lower for the year just completed and 3.3 per cent lower in the current year.

Mr Sotiriou expects Perpetual to produce underlying earnings before interest, tax, amortisation and depreciation of $290.6m for fiscal 2023, rising to $371.6m in the current year.

“We believe there are signs that Perpetual does not have a handle on the Pendal deal, and coupled with negative outflows across the board and the heightened risk of further negative surprises and recent share price strength, we are downgrading our rating from underweight to sell,” said Mr Sotiriou in a note.

In February, Perpetual posted a 55 per cent fall in first-half 2023 earnings, due largely to transaction costs associated with the takeover of Pendal.

Perpetual shares have fallen 16 per cent this year. They rose 1.6 per cent on Tuesday to $25.02.