Australian equity market trading at high levels- What does this mean for Investment managers?

2019 was a tumultuous year for many fund managers as they witnessed geo-political ructions and macroeconomic events that have not been witnessed before. In terms of the domestic market, the Australian equity market is currently trading at high levels, driven more by the expansion of valuation multiplies. AMCIL Limited, an Australian investment management company, recently advised that significant growth in the market is likely to be more challenging.

In the light of the above-mentioned scenario, let us look at few investment managers trading on Australian equities.

AMCIL Limited (ASX: AMH)

The investment management company, AMCIL Limited has a strong portfolio which comprises 30 to 40 stocks covering large and small companies in the Australian equity market, looked after by a Board and Investment Committee with extensive investment skills and practical business experience. The company’s investment approach is to have a focused portfolio in which large, mid and small companies can have an equally important impact on portfolio returns.

The company today has revealed the results for the half-year ending 31 December 2019.

During the half year period, the market continued to generate positive returns for the company following on from the strong momentum built in the first half of the calendar year. AMCIL’s total portfolio return, including franking, over the half year was 10.2 % and 29.2% over the 12 months, attributed mainly to the healthy exposure of the portfolio to large companies such as CSL, Macquarie Group, James Hardie Industries and Wesfarmers. Besides this, smaller companies that also contributed strongly to performance were Carsales.com, Objective Corporation, Wellcom Group (which was taken over) and Xero.

Portfolio Performance To 31 December 2019 (Source: Company Reports)

Major Highlights

• Profit for the half-year, which was $3.8 million, was up 4.4% from the previous corresponding period. This was primarily due to an improved result from the trading portfolio this year.
• Revenue from investments was $4.4 million, down 2.3% from $4.5 million in the previous corresponding period. This excludes capital gains on investments.
• No interim dividend was declared.
• Last year, due to special circumstances, the Board declared an interim dividend of 2 cents and a special dividend of 1.5 cents, both fully franked.
• Net tangible asset backing per share before any provision for tax on unrealised gains at 31 December 2019 was 102 cents per share (2018: 88 cents before any provision for the interim and special dividends).
• A final dividend of 3.5 cents per share (fully franked) in respect of the financial year ended 30 June 2019 was paid on 23 August 2019.
• Management expense ratio of 0.59% (2018:0.66%)

Over the past 18 months, the company has been trying to reduce the number of holdings in the portfolio to strengthen its existing positions in quality holdings, exiting positions where there was less conviction about the investment thesis. Further, the company is trying to add new holdings that better fitted the emphasis on quality companies with strong industry positions.

In the last six months, the company announced major sales which included positions in Westpac and National Australia Bank, AUB Group, Lifestyle Communities and a reduction in the holding in BHP Group. The sales proceeds from these were redeployed across a range of existing holdings, including companies such as Ramsay Health Care, CSL and Macquarie Group. Funds were also utilised to add new companies to the portfolio, the largest of these purchases being in Goodman Group, Macquarie Telecom, Cleanaway Waste Management and Lendlease Group.

While providing the outlook, the company stated that with the Australian equity market trading at high levels, driven more by the expansion of valuation multiplies rather than earnings growth, further significant growth in the market is likely to be more challenging.

At market close on 21 January 2020, AMH stock was trading at a price of $0.985, down by 1.005% intraday with a market cap of around $277.13 million.

Platinum Asset Management Limited (ASX: PTM)

Platinum Asset Management Limited a lead wealth manager in Australia which has been working to substantially reposition its business to be more globally focussed and outward looking. Notably, in the last three months, PTM stock has provided a return of 14.83% to its shareholders.

During last year, Platinum established a new distribution office in London, with a team of three staff, focussed on strengthening its distribution efforts in the UK and Europe, with a particular focus on its European investment vehicles, which were launched around four years ago and currently have around $400 million in FUM. The company’s London team, with the support of its team in Australia, has been busy servicing its existing European client relationships, building new relationships and expanding its ability to access new European markets.

At the end of December 2019, PTM had a FUM of $25,117.76 million.

Pinnacle Investment Management Group Limited (ASX: PNI)

Pinnacle Investment Management Group Limited, recently entered into agreements to acquire a 25% equity interest in Coolabah Capital Investments Pty Ltd, a leading long-only and long-short active investment-grade credit manager which currently is responsible for managing around $3 billion of institutional and retail investment.

Key terms of the agreements include:

• Pinnacle will acquire a 25% interest in CCI for $29.1m, together with a further $5m upon the business achieving certain milestones over the next 18 month to 4.5-year period;
• CCI and Pinnacle have entered into a global distribution partnership in which Pinnacle will share revenues from capital raised in the institutional, retail and offshore distribution channels;
• The acquisition is subject to certain limited conditions precedent;
• Pinnacle and remaining shareholders will enter into an agreement with standard minority shareholder and governance protections for Pinnacle;
• The acquisition is subject to certain limited conditions precedent;
• Completion is expected to occur on or about 16 December 2019 and is funded by a facility from the CBA announced previously.

At market close on 20 January 2020, PNI stock was trading at a price of $4.660 with a market cap of around $867.1 million.