Shares in BT Investment Management (ASX:BTT) are down nearly 30% from last year’s peak. As an investment manager with global exposure, are the shares now cheap enough to buy? And do the charts indicate strong support at current levels?
BT Investment Management is a pure play investment manager and has a global distribution footprint with ~40 specialists across Australia, US, Canada, UK/Europe and Singapore. The Company offers global exposure and has fund offerings spread across many asset classes.
The acquisition of JO Hambro Capital Management (JOHCM) in October 2011 was a pivotal moment in the Company’s recent history. Since its acquisition, JOHCM has demonstrated the most rapid growth in Funds Under Management (FUM) out of the different distribution channels. As at 31 December 2017, JOHCM accounted for 54% of group FUM, with the balance comprising FUM from three channels of the BT Investment Management operations. The significance of JOHCM is such that since its acquisition in October 2011, net fund flows from JOHCM on a quarterly basis have supported overall funds flow. This is during periods where fund flows from BT Investment Management have been either negative and/or volatile.
BT Investment Management fund flows
Fund flows and performance in JOHCM to be a key driver of growth and catalyst for the stock. To this end:
1. Recent quarterly flows for JOHCM have started to slow, particularly in the UK operations. After a period of positive (although progressively declining) net flows, JOHCM reported negative net flow of -$0.6m in the December 2017 quarter. The outlook for flows in the UK business remains somewhat uncertain in light of the recent implementation of MIFID2* and there is potential for further redemptions from the UK Opportunities Fund.
2. Future funds flow and performance fee prospects for JOHCM remain highly reliant on the continued performance of a small number of funds.
The extent to which fund flow and performance of the BT Investment Management funds can mitigate the challenges in JOHCM are made difficult by further BT Investment Management redemptions. These redemptions are expected over the next 12-18 months as a result of Westpac exiting MySuper from BT Investment Management.
Further, BT Investment Management is facing an increase in its fixed cost base in FY18 and FY19, which is likely to keep operating margins flat.
Is BT Investment Management cheap?
Overall, we consider that BT Investment Management is not exactly in value territory. With the shares trading on a 1-year forward PE multiple of ~16x and only slightly below its average of ~17x since the beginning of calendar year 2013, improved quarterly flows for JOHCM is the key catalyst from here.
The chart for BT Investment Management
After peaking in 2015, the shares were sold off heavily, falling from $13 to under $8. After finally recovering to near $13 again, they were once again sold down. The testing and failure of this 2015 is a concern (circled). This can often lead to a stock going back to retest its prior low. In this case, we are looking at that $8 level seen in mid-2016. The shares are once again languishing and this leads us to believe that much lower levels are a possibility during 2018.
*MiFID is the EU legislation that regulates firms who provide services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded.
Michael Gable is managing director of Fairmont Equities.
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