Australian Fund Managers Face ‘Earnings Headwinds,’ RBS Says

By Malcolm Scott

March 24 (Bloomberg) -- Australian fund managers including Platinum Asset Management Ltd. and Challenger Financial Services Group Ltd. face “numerous earnings headwinds,” and investors should remain “underweight” the shares, said Royal Bank of Scotland Group Plc.

The nation’s publicly traded money managers will be weighed down by weak fund flows; investors’ continued preference for cash; lower average funds under management; a growing aversion to alternative investments; declining property valuations; and widening credit spreads, analysts led by Sydney-based John Heagerty wrote in a note to clients dated yesterday.

“Managements are essentially powerless to prevent profit erosion in the face of shrinking revenues,” the analysts wrote. Meanwhile, the collapse of some large hedge funds “has damaged investor confidence in alternative assets, which will likely result in a continued shrinking of the asset class in 2009.”

Total assets managed by Australian pension funds, unit trusts, life insurers and managed funds fell to A$1.19 trillion ($837 billion) as of Dec. 31, from A$1.4 trillion a year earlier, as the credit crisis sparked a rout in stock markets and asset prices and widened credit spreads.

RBS lowered its earnings per share estimates for the year ending June 30 for the local fund managers by between 1 percent and 8 percent. RBS kept its “sell” recommendations on Perpetual Ltd. and Platinum, saying they remain overvalued at 16 times and 17 this year’s forecast earnings.

RBS recommends investors “hold” shares in BT Investment Management Ltd. and Henderson Group Plc because of their “more modest valuations.” It has a “buy” call on Challenger, saying the business is “stronger than its valuation implies.”

Platinum, controlled by Kerr Neilson, last month said first- half profit fell 34 percent to A$64.7 million as management and performance fees tumbled along with global stock markets. Challenger, backed by billionaire James Packer, reported a first- half loss of A$107.9 million as the value of investments declined amid the deepening global credit crisis.

To contact the reporter on this story: Malcolm Scott in Sydney at Mscott23@bloomberg.net