Working towards Perennial success

Boutique investment houses have risen to the surface in recent years, but few people would considerPerennialin that class.

However, this is exactly how Perennial Value Managers managing director John Murray pitches the Perennial funds management group.

Perennial Value Managers is part of Perennial Investment Partners, which is in turnIOOF's specialist investment management company and a majority-owned subsidiary of the IOOF Group. It is also responsible for managing all IOOF-branded retail and wholesale managed funds.

And its task is no small one because IOOF has $5.6 billion in funds under management, advice and administration, of which Perennial manages nearly $2.9 billion.

“As a boutique with institutional resources, we have the best of many worlds,” Murray says, emphasising that with the support it receives from IOOF its investment professionals are free “to get on with the job of managing money and making investment decisions”.

As a boutique investment management firm Perennial has also made a name offering wholesale investment services to superannuation funds, companies and institutions, while IOOF Funds Management is the administrator, unit trust manager and marketer of products to the retail market targeting financial planners, dealer groups and master trusts.

IOOF head of retail investments Mark Knight says the arrangement has been beneficial and “our success so far has exceeded our expectations and we are confident as we move towards a listing during 2003”.

While IOOF demutualised earlier this year and will list next year on the Australian Stock Exchange, no separate listing is planned for Perennial. Murray emphasises that having IOOF as a majority shareholder “enables Perennial to offer the advantages of a specialist firm while benefiting from the support of an established player”.

Murray highlights three areas where he believes Perennial differentiates itself — the way it is structured, partners/equity ownership and access to a strong balance sheet via IOOF.

“Perennial has been structured to create an alignment of interests between investors and our key investment professionals. They own significant equity in the firm, which is spread among some 12 individuals, which is a large number for such a firm,” Murray says.

He adds that equity has been set aside to increase this number, but underlying this remuneration package is the concept of salary sacrifice of up to half what industry peers are earning.

Bonuses, which only kick in after three years, are based on investment and revenue performances.

“We are clearly backing ourselves. This has enabled us to recruit some of Australia's best investment professionals and we believe it is a key reason behind our performance to date,” Murray says.

Perennial Value Management’s five-person investment team applies a moderate value investment style across all asset classes.

“We emphasise fundamental company research and look to buy companies cheaply. We see ourselves first and foremost as an astute stock picker, determining the relative value of securities and companies. In this way, sentiment does not drive our investment decision-making,” Murray says.

A key strategy with this style is to ensure the portfolio’s price/earnings ratio is less than the market average and that the gross dividend yield is higher than the market’s average.

“By embedding our style in our investment process, we ensure there is never style drift.”

Perennial Investment Partners invests in all major world equity and fixed interest markets. Its assets are currently split into Australian equity (32 per cent of the total funds under management as at the end of September), Australian fixed interest (60 per cent) and global fixed interest (two per cent). It also offers a diversified balanced fund.

“We are not reliant on one asset class to build our business,” Murray says.

Perennial Value Management returned 11.5 per cent in the year to end of August (ranked third by Mercer’s survey of 36 funds). Over two years it returned an annualised 16.2 per cent (ranked first out of 32 funds).

In Australian fixed interest, Perennial has the best five-year return out of the 29 funds in Mercer’s survey (7.3 per cent per year). Over the past year it returned 5.8 per cent, ranking it third among 32 funds.

Assirt has applauded IOOF/ Perennial for making a number of good strategic choices in its funds management process. It notes that Perennial’s annual strategic asset allocation saw it replace inflation-linked bonds with hedged global fixed interest in its diversified funds, which have led to greater liquidity and slightly higher returns.

Of IOOF/Perennial’s various sector capabilities rated by Assirt, Australian fixed interest and cash were judged very strong, while business management, operating capability and Australian equities (value) also received a strong rating. Asset allocation, Australian equities (GARP), international equities, property securities and international fixed interest were all awarded a competent rating from the research house.

Of IOOF’s 25 funds reviewed by Assirt, two received five-star ratings, six achieved four-star ratings, while just under half were judged as three-star funds. Another five funds had a two-star status.

Looking ahead, Knight anticipates both organic growth and growth through IOOF’s investment in financial planning groups.

“We have considerable capacity to grow assets under management.”

He adds that IOOF’s strategy is not to acquire firms outright, instead it enters strategic partnerships by purchasing minority stakes.

The most recent example is its partnership with the Ellfield Financial Group in New South Wales.

“We want to ensure that dealer principals retain their entrepreneurial spirit. They run the business and we supply services where we have a clear competitive advantage.”

Knight identifies two areas for future growth. The first is by partnering with “successful dealer firms able to use our technology and dealer services platforms”.

The second is by becoming “a fund manager of choice via excellence in our core competencies of Australian fixed interest, balanced funds, Australian and international equities”.

He adds that on the distribution side “we have already formally aligned with several high quality dealer firms. In relation to funds under management, we have strong endorsements from the third party research houses, and approvals with nearly all national dealer groups and master trusts.”