Results

This year Pendal has reported a reduced profit on the previous year, for the first time in eight years. A confluence of events, including a significant reduction in J O Hambro Capital Management (JOHCM) performance fees and impacts on revenue as a result of investor sentiment in reaction to geopolitical and macro-economic events, have contributed to this outcome.

Our key measure of financial performance Cash Net Profit After Tax, was $163.5 million, down by 19 per cent. This represents a reduction of 19 per cent in cash earnings per share to 51.3 cents.

A final dividend of 25 cents per share was declared, bringing total dividends for the year to 45 cents. Total Shareholder Return since listing is 188 per cent, which is well above the 67 per cent return of the Standard and Poor’s ASX 200 Accumulation Index over the same period.

Cautious investor sentiment has seen some significant shifts out of equities and into bonds, which has affected both flows and margins. It is significant that the majority of Pendal’s outflows have been from our European equity strategies, largely as a result of the turmoil of Brexit, along with the trade tensions impacting on global growth and the general ‘flight to security’ by investors.

In Australia, the ramifications of the Banking Royal Commission have affected investor trust and confidence. As a consequence, flows have been affected across the financial services industry and the diversified financials sector has experienced a de-rating in Australia as a result of prevailing conditions and changing investor sentiment.

Our underlying business, however, remains strong. Our business model built on geographical and business diversity helps us manage through the market cycles.

As a global asset manager, we are attuned to cycles. However, we always look to the long-term. We consistently execute our long-term strategy; we seek out long-term growth opportunities; our asset managers invest to deliver long-term returns for their clients; and, as a listed company, we seek to deliver sustainable, long-term growth for our shareholders.

We cannot control the markets, only our own actions. We expect and plan for market fluctuations, while always remaining true to label. Our strategy of diversification, our emphasis on investment independence, our operating platform supporting a diverse range of investment teams, and our disciplined approach to capital management means we have consistently delivered for shareholders and clients since listing. Based on these fundamentals, we are well positioned for the current volatility and uncertainty.

Continuing uncertainty causing negative investor sentiment

Reflecting on what I said in my letter last year, it is clear that we are still in times of uncertainty. The only real change seems to be that the level has heightened. Instability in the UK, under the all-pervading shadow of Brexit, dominates headlines. During 2019, the simmering trade war between the US and China has contributed to the negative sentiment and volatility.

No asset manager, global or otherwise, can be immune to this for long. Investors do not like uncertainty. Once you have uncertainty and ambiguity in equity markets, investors’ decisions change and often change rapidly.

This is why we are seeing the current volatility in our business. It is most apparent in Europe where investors are selling equities and buying bonds, or alternatively going to cash. At the time of writing, the value of global bonds with negative coupon rates is approximately US$17 trillion – a 174 per cent increase since October 2018. This growth is on a scale that we have never seen before.

The sector of diversified financials has experienced a significant de-rating. The decline in share price and the de-rating in the price-earnings ratio have been common features for asset managers across the globe. In the case of Pendal, our share price declined 16 per cent to $7.39 during the year.

It is, of course, not the first time we have seen downturn in an equity cycle and it will certainly not be the last. 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.

History is a great teacher and it shows us that equities outperform every other investment in the long term. Pendal’s strategy in the face of this volatility is to manage and position our investments in a sustainable way over a period of years, not months. We ensure we have the best people managing our investments and we position ourselves to be in the markets with the most potential for long-term growth.

Remain debt free

As we continue to operate in a period of heightening volatility, the Board continues to apply a long-term view of balance sheet management in order to safeguard a strong capital position through market cycles. We have no debt.

We are well positioned to look at capabilities and products where we see good growth and long-term potential.

Seed capital

Our seed capital portfolio is an important element of our investment strategy and has been growing as investments have been made in new strategies.

Our approach to seed funding is prudent. When we invest to fund a new strategy, we do so on the understanding that it takes time and patience to build track record to support FUM growth.

Expansion in the US

Since the acquisition of the JOHCM business in 2011, our offshore presence has grown significantly and provided an increasing contribution to the Group’s FUM and profit. Pendal had closing FUM of $100.4 billion as at 30 September 2019. We have been able to increase our FUM from clients in North America to $22.8 billion, which is more than 20 per cent of our total FUM. We have achieved that with a modest presence in that market.

As the largest equities market in the world, the US has great growth potential. In order to increase our growth in the US, during the 2019 Financial Year we enhanced our strong leadership by appointing Nick Good as CEO of the JOHCM US business. His mandate is quite simply to grow the business.

While the US represents our best prospect for growth, Europe remains the biggest portion of our business and has continuous growth potential. We employed an experienced leader in Alexandra Altinger to lead our business in the UK, Europe and Asia. Alexandra has broad experience across multiple markets.

Importantly, both JOHCM CEOs have strong track records of growing businesses through innovating and are acutely aligned to our culture of independent investment without following a ‘house view’.

Business model is strong

Our core business model remains active investment in equities on behalf of our clients. Pendal is a people business and a significant element of what we do is talent management.

Diversification remains one of our cornerstone strengths. Not all markets move in the same direction at the same time or the same speed. Our diversification out of Australia and into Europe, the UK, Asia and the US allows us to intelligently manage the volatility that will inevitably be a feature of every market.

Through the cycles, we stay true to label and make disciplined and methodical decisions that deliver long-term value and growth for our clients, and thus our shareholders.

ESG expertise: a growth opportunity

During the year we moved to full ownership of our co-founder’s stake in Regnan, a respected environmental, social and governance (ESG) organisation. This closer alignment with Regnan is consistent with our strategy of responding to our clients’ preferences and supporting our objectives to improve investor outcomes through our thought leadership on ESG matters.

Making Regnan part of Pendal will enhance Regnan’s capability and service proposition to its clients by enabling it to leverage the fundamental insights of a highly regarded investment management organisation across equities, fixed income and multi-asset portfolios.

Governance

The Board takes corporate governance very seriously and considers an ongoing review of procedures as an integral element of our business strategy. In 2018 we sought to strengthen and enhance Board performance through an independent expert review, the recommendations of which we have been assiduously implementing. The election of Non-executive Directors Sally Collier and Christopher Jones to the Board at the 2018 Annual General Meeting reflects our continual Board renewal and the inclusion of international, and internationally experienced, Directors.

Outlook

Searching for short-term consistency in financial markets is like looking for right-angles in a thundercloud. Markets are shaped by people buying and selling and driven by sentiment and individual views of the future. Rational thoughts become clouded. Emotions come into play. The best thing your Board can do in uncertain times as custodians of your investment in Pendal Group is to plan and manage for heightened risk and diligently work for the long term.

Our strength is our people and our unrelenting conviction in the positions we take. 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.

It is our strategic commitment to diversification across geographies, clients, investment teams and products, as well as our investing for long-term growth, that has guided us through numerous market cycles and made us a leading global asset management business.

I would like to thank the management team and all our people for their personal contribution. I would also like to acknowledge my Board colleagues for their resolve, commitment and support for the long-term success of the business.