Perpetual Limited's principles provides buying opportunity


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Perpetual LTD (ASX:PPT)

Key statistics:

Closing share price 8-9-16: $47.200


52-week high: $50.16

52-week low: $37.37

Most recent dividend: 130c

Annual dividend yield: 5.4%

Franking: 100%

American novelist Paul Theroux once said "it's usually expensive and lonely to be principled". Perpetual's chief executive Geoff Lloyd might agree after announcing a 4% fall in underlying profit.

The investment company is unapologetically focused on value. But with value hard to find, its managers have been sitting on their hands more than they would like and the performance of its funds has been sluggish.

Although most of its flagship funds are still rated in the first or second quartile over three years and more, 11 out of 15 are now ranked in the third or fourth quartiles over one year.

This, together with fragile equity market sentiment, no doubt contributed to Perpetual Investments' first net fund outflow since 2013, of $0.3bn.

The greater impact, though, was from market falls and distributions, which knocked a further $0.5bn from funds under management (FUM), leaving average FUM 7% lower over the year at $30.0bn. This in turn led to a 5% fall in revenue, and almost $2m of cost reductions and higher than average performance fees were not enough to prevent profit before tax falling around 6%.

Markets are unpredictable in the short term, which means you have to live with some ups and downs when investing in fund managers. Over time, though, shares tend to do well, particularly when selected according to sound value investing principles.

Over time we expect these trends to support Perpetual. The company is also less reliant on individual stars than other value-based managers such as Magellan Financial Group and Platinum Asset Management. We also expect to see further growth in the Perpetual Private and the Corporate Trust business.

With markets already higher than their average level for the 2016 financial year, we're hopeful of a return to earnings growth in 2017, although it's very early days.

Disclosure: The Intelligent Investor Growth and Equity Income portfolios own shares in Perpetual.

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Andrew Legget is an analyst at Intelligent Investor.