Whenever a stock in the Portfolio suffers a steep price drop, the Portfolio Managers are faced with the task of looking at the reasons behind the fall and deciding whether it changes the long-term investment thesis for the security. This requires us to revisit our reasoning behind the ongoing investment decision and incorporate the new information – and then look forward.

Obviously, the testimony at the Royal Commission has been terrible, and in our view, the presentation and manner of the executives has been very poor. Having said that, the actual issues raised have related to historic behaviour and were already being addressed with the regulator.

From a purely financial point of view, the damage is relatively limited. The larger reputational damage is potentially more serious, and the relationship of the firm to the regulator (a vital element in financial services) is likely damaged, after revelations of misleading statements by AMP. However, once again, in the context of AMP’s industry competitors being in much the same boat and the rapid response from the firm with management changes and independent reviews announced on Friday, 4 May, we see this as being recoverable in the medium term.

In particular, we see the announcement of Mike Wilkins as interim CEO, as very encouraging and a good first step to improving overall management results. Mike Wilkins has a very impressive track record, in particular from his time at IAG, and we believe he has the credibility and experience to put in place a meaningful process for addressing the identified shortcomings.

A Positive Outlook for AMP?

While we do anticipate a difficult period for AMP and indeed for the wealth management sector as a whole, we remain positive about the medium-term outlook for AMP for the following reasons:

  • the mandated growth in superannuation assets, given its strong market position
  • a very strong balance sheet, with the potential for further capital management initiatives
  • reduced earnings volatility, due to the quota share agreement for the retail insurance portfolio
  • offshore relationships are driving increased assets under management at higher margins
  • home loan market share growth, driven by cross-selling of products and the active acquisition of mortgage brokers. Further mortgage rate increases are a positive for net interest margins
  • improving investor confidence drives a switch into higher margin equity products.

The Challenge Ahead

There will be major challenges facing AMP – in particular, a likely increased regulatory and compliance burden, however somewhat counter-intuitively, this may in fact be beneficial for the larger institutions, which have the resources to meet these extra costs, compared to smaller firms.

In summary, we still consider AMP’s very large adviser network as its major strength. We see the problems highlighted at the Royal Commission as mostly reflective of senior management, and expect more resignations at this and Board level in coming weeks. Higher penalties and greater enforcement of misconduct are seen as the most likely outcomes from the recommendations of the Commission, which hopefully should result in better industry-wide outcomes.

  • AMP has over 3.8 million customers in Australia and New Zealand
  • AMP Capital manages $A188 billion for clients
  • CEO, Craig Muller resigned on 20 April, followed by Chairperson, Catherine Brenner on 30 April

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.