PendalGlobal Operating Review
Our business
Pendal is a global independent investment management business focused on delivering superior investment returns for our clients through active management.
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82
investment professionals
20
years average industry experience
19
investment teams
8
years average tenure across Group
Turnover of investment staff is 2 per cent over the last 5 years
Attract and retain talent
Pendal offers a broad range of investment strategies under a 100 per cent owned multi-boutique structure. We do not adhere to a ‘house-view’ and investment teams are provided with autonomy and independence of thought to make decisions with conviction underpinned by a philosophy that celebrates a diversity of insights and approaches. The opportunity to own equity in the business provides alignment between employees and shareholders.
Global leadership
Pendal Group established a Global Executive Committee in 2016 to support the execution of its global growth and diversification strategy. During the 2019 Financial Year, Pendal strengthened the team with the appointments of Alexandra Altinger as CEO of the JOHCM operations in the UK, Europe and Asia, and Nick Good as CEO of the JOHCM operations in the US (to commence in December 2019), and Bindesh Savjani as the Group Chief Risk Officer.
Global Executive Committee (l to r):
Cameron Williamson, Alexandra Altinger, Richard Brandweiner, Bindesh Savjani, Emilio Gonzalez
Investment performance
A leading global active investment manager, Pendal’s strong long-term outperformance provides clients with comfort in managing their money through economic cycles. Client success stands at the core of everything we do. We partner with our clients through the understanding that trust is earned by delivering results. Pendal also has an increasingly important sustainable investment capability that integrates environmental, social and governance factors in the decision making process on behalf of investors and the community.
We aim to achieve superior investment returns for clients across our diverse investment capabilities and adopt a disciplined approach to capacity management to preserve investment performance.
52%
of FUM has outperformed over 3 years1
79%
of FUM has outperformed over 5 years1
1 Fund performance is pre-fee, pre-tax and relative to the fund benchmark; % of FUM outperforming relates to FUM with sufficient track record only
| Investment personnel | Sales personnel | |
|---|---|---|
| US | 11 | 14 |
| UK/Europe | 26 | 13 |
| Australasia | 45 | 20 |
Global scale and diversification
The Group has in excess of $100 billion in FUM with a presence in markets representing more than 90 per cent of investible assets worldwide. Our global distribution across multiple sales channels enables our investment strategies to be offered to a broad range of clients, providing a platform for future growth in funds and revenue.
Financial strength
Our balance sheet provides strength to our business. We have no debt with a seed portfolio that supports growth initiatives and diversification of revenue streams. Pendal Group’s strong cash flow means it is well positioned to take advantage of opportunities and its history of applying a consistent payout ratio means it has been able to reward shareholders with regular dividends.
Financial performance
Cash NPAT for the 2019 Financial Year was $163.5 million, a decrease of 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.
Read moreCollapse| Five-year profile | FY15 | FY16 | FY17 | FY18 | FY19 |
|---|---|---|---|---|---|
| Cash NPAT | $132.5m | $156.0m | $173.1m | $201.6m | $163.5m |
| Statutory NPAT1 | $126.4m | $142.0m | $147.5m | $202.0m | $154.5m |
| Operating revenue | $436.6m | $493.9m | $491.0m | $558.5m | $491.2m |
| Operating expenses | $268.2m | $297.0m | $281.9m | $316.9m | $290.2m |
| Operating profit margin | 39% | 40% | 43% | 43% | 41% |
| Cash earnings per share (cents) | 44.0 | 50.8 | 55.3 | 63.7 | 51.3 |
| Dividends (cents per share) | 37.0 | 42.0 | 45.0 | 52.0 | 45.0 |
| Average FUM | $75.2b | $80.2b | $90.4b | $99.5b | $98.8b |
| Closing FUM | $78.4b | $84.0b | $95.8b | $101.6b | $100.4b |
1 FY18 Statutory NPAT has been restated in accordance with Accounting Standard AASB9
Funds under management (FUM)
The Group’s FUM closed at $100.4 billion, 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 (on foreign denominated FUM).
Institutional channel net inflows (+$1.5 billion) remained strong during the year, particularly in cash and fixed income asset classes. The higher margin wholesale channel saw net outflows, particularly in the Open-ended Investment Companies (OEICs) (-$3.6 billion) which were impacted by Brexit uncertainty and negative investor sentiment towards European equities. In contrast, the US pooled funds generated net flows of +$0.7 billion predominantly in international and emerging market strategies, while the Australian wholesale channel flows were flat. Outflows from the Westpac book totalled $3.3 billion for the year largely as a result of the ongoing run down of the legacy book and withdrawals reflecting changes in the Westpac superannuation portfolios.
| $b | 30-Sep-18 Closing FUM |
Net flows | Other2 | FX impact | 30-Sep-19 Closing FUM |
|---|---|---|---|---|---|
| Institutional | 33.9 | 1.5 | 2.2 | 0.4 | 38.0 |
| Wholesale | |||||
| Australia | 7.9 | - | 0.3 | - | 8.2 |
| OEICs | 23.5 | (3.6) | (1.0) | 0.2 | 19.1 |
| US Pooled | 15.3 | 0.7 | (0.6) | 0.9 | 16.3 |
| Pendal Group Core Funds | 80.6 | (1.4) | 0.9 | 1.5 | 81.6 |
| Westpac - Other1 | 13.5 | (0.6) | 0.9 | - | 13.8 |
| Westpac - Legacy | 7.5 | (2.7) | 0.2 | - | 5.0 |
| Total Pendal Group FUM | 101.6 | (4.7) | 2.0 | 1.5 | 100.4 |
1 Westpac - Other: represents all Westpac directed mandates covering corporate and retail superannuation, multi-manager portfolios, managed accounts and Westpac capital
2 Other: includes market movement, investment performance and distributions
Investment performance
Despite concerns over global growth and increased investor caution, global equity markets recovered after a significant decline in the December quarter. For the 12 months to 30 September 2019, the MSCI ACWI Index in local currency terms and the UK market were largely flat while the US, Australian and European markets rose 2 per cent, 8 per cent and 2 per cent respectively. Asian markets lagged as trade tensions between the US and China weighed heavily upon investors.
Investment performance over one year and three years is mixed although long-term investment performance remains strong with 79 per cent of investment strategies outperforming their benchmarks over five years to 30 September 2019. Strategies that have performed strongly over the last 12 months include Global Opportunities, Asia ex Japan, Australian Microcap, Global Emerging Markets Opportunities, Global Income Builder and the Monthly Income Plus strategy. A number of strategies have shorter term performance weakness, particularly those with a value bias or an underweight position to large-caps.
| FUM FY19 ($b) |
% FUM out- performed1 3 Yr |
% FUM out- performed1 5 Yr |
|
|---|---|---|---|
| Equities: | |||
| Australian | 17.3 | 80% | 88% |
| Global/International | 30.8 | 30% | 76% |
| UK | 10.6 | 88% | 96% |
| European | 6.7 | 0% | 100% |
| Emerging markets | 4.4 | 70% | 100% |
| Asian | 1.9 | 0% | 3% |
| Property | 2.0 | 100% | 100% |
| Cash | 11.4 | 100% | 100% |
| Fixed Income | 8.3 | 50% | 50% |
| Multi-Asset | 6.3 | 2% | 16% |
| Other | 0.7 | 86% | 86% |
| Total FUM | 100.4 | 52% | 79% |
1 Fund performance is pre-fee, pre-tax and relative to the fund benchmark; % of FUM outperforming relates to FUM with sufficient track record only
Revenue
Total fee revenue was $491.3 million, down 12 per cent on the previous year, due to significantly lower performance fees (down 89 per cent) and lower base management fees which declined by 4 per cent. Average FUM over the year remained resilient and was 1 per cent lower at $98.8 billion, while strong institutional net inflows into cash and fixed interest strategies impacted base fee margins which were 2 basis points lower at 49 basis points.
Expenses
Total operating expenses were $290.2 million, an 8 per cent reduction on the prior year, primarily as a result of lower variable expenses. Variable employee costs fell reflecting employee variable reward linked to lower revenue and non-staff variable costs were lower due to a decline in third party manager fees. The fixed cost base increased 5 per cent largely due to the addition of 26 FTE over the year which included operational staff in the UK office and eight staff in Australia, after moving to full ownership of Regnan.
Financial position
The Pendal Group’s balance sheet remains strong. Net assets at 30 September 2019 were $910.7 million, an increase of 2 per cent on the previous year, while net tangible assets increased 6 per cent to $370.4 million.
Read moreCollapseSeed investments
Seed investments increased $21.5 million to $259.0 million (2018: $237.5 million) over the year largely as a result of improved market performance and a lower Australian dollar. The seed portfolio has grown significantly over the past three years as new strategies and vehicles are launched and a number of existing strategies are scaled up to a size that makes it more viable for clients to invest.
The seed portfolio is assessed regularly for investment performance and whether the fund vehicle is achieving its targeted scale. Seed investments are subject to redemption when a fund size and maturity is achieved or an investment strategy is closed. The portfolio also contributed to the Group’s earnings adding $5.0 million in distribution income over the year. Following a review, and due to a lack of client demand, the Group has announced that it will close the JOHCM Global Smaller Companies and the JOHCM US SMID strategies. Seed investments with a market value of $108.9 million are invested in these strategies, and once closed are expected to generate a realised gain of approximately $38.0 million to be reported in the 2020 Financial Year.
1 Seed investments and net cash excludes escrowed fund manager deferred remuneration held in trust
Cash
Net cash held by the Group at 30 September 2019 was $149.0 million (2018: $163.7 million). Cash flows from operations are generally held for working capital purposes, purchase equity for employee share schemes, and to fund strategic initiatives including seed investments. Cash flows earned by overseas subsidiaries within the Group are held in foreign currencies, predominantly British pounds and US dollars, until repatriated to the Australian parent through inter-company dividends through the year. Those dividends remain hedged in Australian dollars until paid.
Intangibles
Included on the Pendal Group’s balance sheet as at 30 September 2019 were intangible assets of $540.3 million consisting of goodwill and management rights associated with the acquisition of JOHCM in 2011 and goodwill arising from the purchase of the BT Investment Management business in 2007. There was no impairment to the carrying value of goodwill during the year. The management rights associated with the acquisition of JOHCM continue to be amortised over time.
Liabilities and debt
The Pendal Group’s liabilities consist mainly of trade creditors and accruals and employee benefits. Total liabilities fell to $184.8 million at 30 September 2019 (2018: $198.6 million) reflecting lower provisions for variable employee remuneration in line with reduced corporate profits during the year.
The Group has no debt, although maintains an AUD$25.0 million multi-currency revolving loan facility with the Westpac Group. During the 2019 Financial Year the facility was not drawn upon.
Equity and dividends
The issued capital of Pendal Group Limited increased by 4,795,815 ordinary shares during the 2019 Financial Year (2018: 2,304,178 ordinary shares), comprising shares issued to satisfy equity rights held by fund managers as part of the Fund Linked Equity (FLE) scheme, a remuneration scheme for certain JOHCM fund managers.
The FLE program is designed to be broadly Cash EPS neutral due to a reduction in revenue-share the fund managers subsequently receive, which has a positive contribution to Pendal Group earnings, provided FUM is maintained post-share issuance.
The Directors declared a final 2019 dividend of 25.0 cents per share, bringing total dividends for the year to 45.0 cents per share, a 13 per cent decrease on last year’s dividend of 52.0 cents per share. The total dividend represents a payout ratio of 88 per cent, which is within the Group’s payout ratio target of 80-90 per cent of Cash NPAT. The Board has re-affirmed the Group’s payout ratio policy of paying 80-90 per cent of Cash NPAT, however from the 2020 Financial Year, Cash NPAT will exclude realised movements in financial assets. This would, for example, exclude realised gains on seed investments, which are used to support future growth of Pendal Group and considered capital in nature.