Platinum Asset Management has announced it will buy back up to 10 per cent of its outstanding shares on the open market, as short sellers take aim at the prestigious fund manager.
The move, announced after market on Tuesday, has pushed Platinum shares up by almost 10 per cent to $5.36 after a 20 per cent fall since August 24.
Platinum said it would undertake the buy-back of shares, should they trade at a significant discount to underlying value, over the next 12 months, a move the board considered was in the interests of all shareholders.
The buy-back announcement comes as smaller hedge funds take aim at the fund manager and its business model which they say has neglected the sales and distribution function.
Platinum founder Kerr Nielson and his ex-wife Judith each own 26.6 per cent of the company which is one of the most profitable funds management businesses globally.
However, the fund manager’s share price has come under pressure over the last twelve months as outflows have picked up as funds have performed below their benchmarks. The stock has fallen about 40 per cent since late December 2015, and about 45 per cent from its peak of $9.20 in early 2015.
The move was met with mixed reaction amongst brokers that cover the stock. Morgan Stanley retained an under-weight on the share price, which it said was expensive relative to peers.
A buy-back would deliver 10 per cent earnings accretion but would “constrain future growth opportunities” such as the expansion into Europe, Morgan Stanley said.
Credit Suisse, which has been appointed to act as broker on the buy-back, dropped its ‘under-perform’ call on Platinum following the announcement.
“Fund performance remains weak over the medium term and we expect outflows to continue, however we note that the buy-back is likely to cap further downside,” Credit Suisse analyst James Cordukes said.
The buy-back equates to 15 per cent of annual trade volumes, Cordukes said, which led it to assume Platinum would only complete about half of the approved buy-back.
Morgan Stanley said Platinum did not have enough available cash at present on its balance sheet – at $250 million – to finance the 10 per cent buy back at the current share price.
“While supportive the 10 per cent buy-back at the current share price would exceed available balance sheet funds,” it said.
Struggle to retain funds
Morgan Stanley also said that “timing was a surprise” given the company had reduced its dividend pay-out ratio to below 100 per cent and dropped the special dividend.
Platinum said it would buy back the shares on market from October 4 and will be bought back if the stock trades at a discount to underlying value, with no target price being set.
While the buy-back is expected to boost earnings it may serve to address a decline in Platinum’s share price, which at 15.5 forward earnings is in line with its peers but also at its highest discount to the broader market at 13 per cent.
It comes as a boutique Australian hedge fund Morphic revealed to have been shorting Platinum shares based on the view that the esteemed manager is vulnerable to the fee pressure inflicting the industry.
Morphic believes Platinum will struggle to retain funds without more investment in sales and distribution, a view it expanded on in a blog post on its website.
Morgan Stanley also made reference to the fact that the domestic retail distribution team of three was smaller than its key peers, despite its large retail book and underlying outflows.
While Platinum has underperformed the market, investors are keeping faith that the fund will come good as market conditions change to reward more value focused strategies as the impacts of cheap central bank money abate.
Credit Suisse said the fund continued to experience outflows in July and August which was offset by positive market moves and a strong monthly performance as value stocks gained.
“Overall, funds under management was running ahead of our expectations due to better market movements and fund out-performance despite fund outflows running higher than we expected.”