Across client accounts that have selected the “Income” Australian Equity option, we have bought Pendal Group Limited (ASX: PDL formerly BT Investment Management Limited), an Australian based fund management business with approximately $100B under management across various strategies. Pendal Group operates under two brands; Pendal in Australia and JO Hambro Capital Management (JOHCM) internationally. Pendal is a well-managed business, with a strong balance sheet and a clear growth strategy.

We are positive on the medium-term outlook for Pendal Group for the following reasons:

• Excellent track record of developing new products and extension strategies;
• Capital-light nature of the business means they can grow sustainably and maintain an extremely high dividend payout;
• Longer term increase in asset values underwrites growth in FUM and revenues;
• Demonstrated ability to attract, retain and reward investment and distribution talent;
• Disciplined capacity management to preserve investment performance and management fee income;
• A strong balance sheet and solid cash generation means the group is well placed to provide seed capital for the launch of new products and strategies which will help drive future growth; and
• Excellent diversification across asset class and geography. High fixed costs do provide a barrier to deter new entrants.

As with all funds management companies’, business risks include the loss of key investment staff and sustained market weakness which both impact the level of funds under management (FUM) and hence revenue. Furthermore, revenues would be negatively impacted by a material deterioration in investment returns leading to lower performance fees as a source of revenue.

The purchase was funded from the sale of Perpetual Limited (PPT), also a funds management business. While valuation on the stock appears undemanding and the dividend yield is attractive, the combination of poor relative performance versus peers, depressed fund flows, a less diversified product offering and uncertainty over strategic direction with a new incoming CEO leads us to the view that the medium term prospects for Pendal are more positive.

For more information refer to Pendal Group Snapshot.