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Published 13 February 2013 08:00, Updated 14 February 2013 00:59
Investors in wealth management groups are likely to see plenty of blue sky in 2013. Photo: iStock
This column cautiously suggested buying wealth management stocks in July 2012 in anticipation of an improving sharemarket and stronger demand for managed funds.
I should have been more aggressive. Several wealth management stocks have soared in the past year and further gains are likely.
The main wealth management stocks identified – Magellan Financial Group, BT Investment Management, IOOF Holdings and, to a lesser extent, Challenger – have raced higher. This column was especially bullish on Magellan, which has tripled in less than a year but now looks fully valued.
The logic was simple: lower interest rates would encourage investors to sell cash and fixed-interest investments and reinvest in high-yield shares, either directly or in managed funds. Rising fund inflows and a higher sharemarket would boost assets under management and wealth manager earnings.
Admittedly, I expected more of a grinding sharemarket recovery towards 5000 points, rather than the gallop over the past three months. The market has rallied on an expansion in price-earnings multiples rather than genuine earnings growth, making it susceptible to a pull-back in the next month or two as investors digest the interim profit reporting period and reassess the corporate profit outlook.
The pull-back, most likely shallow and brief, should provide an opportunity to buy wealth management stocks at lower prices. They will give back some of their gains in a hurry if risk aversion returns, given the magnitude of share price rises in the past 12 months.
Share price falls could also encourage the big banks to snap up wealth management companies and accelerate the industry’s consolidation. Macquarie Equities Research made a similar point in its excellent review this month of the wealth management sector. Macquarie said the big banks could acquire second-tier asset management and advisory firms, to grow their wealth management operations.
It makes sense. Regulatory reforms such as the Future of Financial Advice (FOFA) and MySuper, effective from this July, will lead to greater transparency on management fees and pricing pressure for wealth managers. As fees fall, wealth managers will need greater scale to compete. More second-tier firms will join forces or inevitably be acquired by big banks.
The potential for takeovers adds to the sector’s appeal. Stocks such as IOOF, Perpetual and even Platinum Asset Management, would bolster the big banks’ wealth management operations, although it is never wise to buy stocks in anticipation of a takeover.
I see wealth management stocks trading higher by year end after a period of consolidation. The Reserve Bank will cut interest rates at least once more this year if the Australian dollar remains stubbornly high and keeps hurting exporters. This will drive more investors from low-margin cash and fixed-interest products into higher-margin shares and funds, and boost managed fund inflows.
Lower interest rates and rising consumer and business confidence, once we get past the September federal election, will lift the sharemarket and swell assets held in wealth management firms. A trading range of 4500 to 5500 for the S&P/ASX 200 index is feasible this year, provided there are signs of stronger earnings growth for the next year or two.
The challenge, of course, will be buying wealth management stock at the right price. One strategy is to look beyond the pure asset management stocks to others that are buoyed by a rising market. Long-time column favourite, IRESS, is a good example. Demand for its stockbroking and financial planning data and systems will rise as the wealth management industry recovers.
IRESS was one of this column’s top 10 small and mid-cap stocks ideas for 2012-13. After being included at $6.32 in July, IRESS has raced to $8.54. I would not chase IRESS higher at these levels, but it should be among the first mid-cap stocks to buy on any market pull-back or correction.
Treasury Group is another small-cap wealth manager to consider if the market falls. It looks well placed for further gains later this year or next, given its stable of quality funds management investments.