Morningstar names 3 undervalued active Australian managers
Latest Morningstar research has discovered which three Australian asset managers are offering the greatest value amid an environment where active managers are losing market share.
In its Australian Asset Manager report for Q2 2024–25, the research house surveyed seven active asset managers in Challenger, GQG, Insignia, Magellan, Perpetual, Pinnacle and Platinum.
It stated active managers are likely to continue losing market share in traditional equity and fixed income strategies to low-cost ETFs.
Shaun Ler, equity analyst at Morningstar, said: “Asset prices are getting stretched. Current allocations to risk assets relative to cash are rather aggressive, notably in equities. We expect active managers to face various challenges, including greater scarcity of undervalued securities, pressure to remain fully invested to avoid underperformance, and competition from passive funds that simply track the market.
“Fund flows for our covered firms generally improved throughout 2024, supported by expectations of falling interest rates in 2025 and relatively low market volatility. But these tailwinds are transient. We expect them to focus on product expansion through partnerships or potential acquisitions, alongside cost management strategies such as aligning remuneration with business size, in 2025.”
The winners, it said, will be those fund managers which can specialise in unconventional products like private debt, private equity and specialised fixed income such as diversified credit and non-investment grade debt. These products typically carry higher risk, are accessible only to select investors, require intensive management or involve subjective valuations, making them more difficult to replicate with passive investment.
Therefore, it identified Challenger, GQG and Perpetual as three asset managers which are offering the greatest value.
Shares in GQG are up by 8.5 per cent over one year, despite backlash around its relation to Adani Group, but Challenger is down by 5 per cent, and Perpetual is down 16 per cent versus returns of 10 per cent by the ASX 200.
“Challenger, Perpetual and GQG offer the greatest value out of our covered firms. We think the market underestimates several of their merits. For Perpetual, these include the potential value from cost reductions and likely flow improvements. For Challenger, we see strong demand for its products and likely gross margin expansion. For GQG, these are its strong long-term track record, below peer average fees, widespread presence on recommended product lists, and good team stability.”
Elaborating further on its reasoning, it said the market is dismissing potential benefits to Perpetual that could come from a decline in interest rates, improved margins, improved flows and capital-light business model.
“The market is pricing in an excessive deterioration in Perpetual’s future cash flow generation, seemingly underappreciating the merits of its diversified business.”
For GQG, which has set up a private capital solutions business to diversify its product range, Morningstar described it as a “high-performing asset manager at a margin of safety”. It is also flagged the firm’s US$153 billion assets under management mean it can achieve earnings growth from the compounding of portfolio returns even when flows are challenged.
Finally, Challenger is likely to see strong performance from its boutique managers which will drive inflows. Unlike the other two managers, demand from an ageing population and partnerships with superannuation funds will fuel growth in sales of its lifetime income products, and lower maturity rates on these will enhance the compounding of its investment assets.
AUTHOR
Laura Dew
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