Asset Manager, Pendal Group's strategy to manage Brexit challenges - Things you need to know

The tide of uncertainty surrounding the Brexit negotiations has caused negative investor sentiment towards European equities. As a consequence of this, many asset management firms operating in the European market are getting impacted.

Global asset management company, Pendal Group Limited (ASX: PDL) recently revealed that it witnessed outflows in its UK and (in particular) European investment strategies during FY19 (year ended 30 September 2019), mainly due to the uncertainty surrounding the Brexit negotiations and concerns about growth in the EU (European Union). This has caused outflows of $2.7 billion from its European strategies and $0.4 billion from its UK strategies.

Pendal reported reduced Profit for the first time in 8 years

In FY19, the group reported a reduced profit on the last year, for the first time in eight years. This was mainly due to several reasons, including:

• impacts on revenue as a result of investor sentiment in reaction to geopolitical and macro-economic events;
• a significant reduction in J O Hambro Capital Management (JOHCM) performance fees.

The company’s cash NPAT for FY19 was $163.5 million, down by 19 per cent on the previous year, while Statutory NPAT declined 24 per cent to $154.5 million. Subdued investment performance contributed to lower performance fee revenue, while base management fees also declined as investor risk aversion, particularly in Europe, led to equity outflows over the year.

Further, the company’s FUM (Funds Under management) closed at $100.4 billion in FY19, a decrease of $1.2 billion over the year. Geopolitical uncertainty and market volatility contributed to net outflows of $4.7 billion, buffered by higher markets and investment performance of $2.0 billion and favourable foreign currency movements of $1.5 billion.

The group’s total fee revenue was $491.3 million, down by 12 per cent on the previous year, impacted by the significantly lower performance fees which was down 89 per cent on pcp and lower base management fees which declined by 4 per cent over the year.

The Pendal Group’s balance sheet remains strong with Net assets of $910.7 million at the end of FY19 and net tangible assets of $370.4 million. There was significant volatility in markets during last year. The first quarter of FY19 was particularly weak due to the anticipation of interest rate hikes – which quickly turned to multiple rate cuts in the New Year. Global trade tensions, which escalated in the first half of the CY 2019, have contributed to a much more sanguine outlook for growth, with the prospects of recession rising.

Further, the impact of the US-China trade war was felt strongly in highly open economies including in Europe where investor concerns were exacerbated by the ongoing uncertainty surrounding Brexit.

Pendal’s Chief Executive Officer Emilio Gonzalez commented:

“The 2019 Financial Year has been one of the toughest on record for Pendal, with investor caution about the world’s prospects exacerbated by ongoing geopolitical turmoil”

How is Pendal responding to the rapidly changing landscape?

Pendal has created a more channel-focused approach with end-to-end accountability for each of its segments (banking and insurance; independent licensees; and private bank/family offices), allowing each team to focus exclusively on their sub-market.

In its recently released annual report, the company has communicated that despite recent period of underperformance, it remain certain that its high conviction, investment performance-led approach will serve its clients well and deliver long-term growth in shareholder returns.

How is Pendal dealing with Uncertainties in the market?

Instability in the UK, under the all-pervading shadow of Brexit, plus the looming trade war tensions between the US and China has contributed to the negative sentiment and volatility.

Pendal is aware that no asset manager, global or otherwise, can be immune to uncertainty for long. Investors do not like uncertainty. Once you have uncertainty and ambiguity in equity markets, investors' decisions change and often change rapidly.

The reason people invest in a company like Pendal is that they want exposure to a diversified global business with growth opportunities that can deliver superior returns over the long term. They also want to see that the exposure is managed in a methodical and disciplined way.

Pendal's strategy in the face of this volatility is to manage and position its investments in a sustainable way over a period of years, not months. The company ensure that it has the best people managing its investments.

In the period of heightening volatility, the company continues to apply a long-term view of balance sheet management in order to safeguard a strong capital position through market cycles. Thus, the company has no debt.

As per Chairman James Evans, the best thing Pendal Board can do in uncertain times is to plan and manage for heightened risk and diligently work for the long term.

Chairman James Evans commented:

“Being willing and able to respond to uncertainty and deploy creative strategies that tackle problems is what Pendal does. Where others see a problem, we see both a challenge and an opportunity.”

FY20 Focus

In Financial year 2020, the company intends to:

• Continue to identify new investment strategies and teams that can materially grow FUM
• Develop extension strategies that can provide further investment capabilities
• Seek out specialist ESG/RI capability that broadens Responsible Investing and ESG offering

The company’s strategic commitment to diversification across geographies, clients, investment teams and products, as well as its investing for long-term growth, has guided it through numerous market cycles and made it a leading global asset management business.

Pendal group is confident about the future, given the quality of its people, strength of its balance sheet and its clear strategy to invest and seek opportunities to grow its business.

Stock Performance

On the stock performance front, PDL stock has provided a return of 16.31% in the last three months. At market close on 7 November 2019, PDL stock was trading at a price of $7.950, down by 3.049% intraday, with a market cap of around ~$2.65 billion and outstanding shares of 322.8 million. The stock is trading at a PE multiple of 15.070x with an annual dividend yield of 5.49%.

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