Australian ‘Wealth Management’ Stocks in 2007

Which stocks and sectors will lead the market in the immediate future here in Australia? Will it be so-called wealth-management stocks? Maybe. “The recent change in the super law allows people to put $1 million into their superannuation fund without paying any tax, which means more money will be coming into the market,” said Albert Hung of Alleron Investment Management in today’s Australian Financial Review.

--“Wealth management stocks, awash with superannuation inflows and backed by a four-year bull market are on track for a strong 12 months, despite trading above their generally accepted valuations,” writes Jonathan Barrett in today’s AFR.  Pretty much any valuation is acceptable these days, it appears to us. There are four big players in the super wealth management business. AMP (ASX:AMP) trades at 23 times earnings, Axa Asia Pacific Holdings (AXA) at 22.5, Perpetual (ASX:PPT) at 22.2, and Challenger (ASX:CGF) at a comparatively cheap 16.

--If it’s a bumper year for super, will it be a bumper year for wealth-management stocks? It’s easy to see why the answer could be yes. It’s almost too good to be true when you find yourself in a business where the customers are legally bound to spend their money with you. And if that weren’t enough, changes in the law are making it more likely the customers will send even more money your way. Clipping the ticket each time, even just a small nick, starts adding up.

--“We expect 2007 to be a strong year for super flows fuelled by the government’s simplification measures, including the one-off opportunity to contribute $1 million after tax pre June 30,” wrote Citigroup in a research note to clients. Super flows already amount to $65 billion, most of that money desperate for a home and a yield in local equities. The wealth-managers (also more commonly known to us as the money shufflers) have their work cut out for them earning a yield on all that money. But they haven’t had to work very hard to get the money in the first place, which is what makes their stocks interesting propositions to traders.

--Not everyone is enthusiastic, though. Goldman Sachs JBWere wrote to clients last week that, “It is not surprising to see funds management stocks trading ahead of our valuations…This is all very well until the music stops. The problem is: no one knows when the music will stop and no one wants to sell too early.”

--We love dancing here at the Old Hat Factory, especially to old swing music. But we think we’ll sit this one out. Avoid the rush for the seats by grabbing one now. It’s true that money-shufflers (wealth managers) have a lot of cash coming their way, and that is surely good for business. But even with money you can have too much of a good thing. Too much cash chasing too few quality assets leads to a lot of stupid asset allocation.

--And if you don’t believe us, just think back to your own childhood. You always appreciated the value of a dollar more once you had to earn one yourself. On the other hand, spending other people’s money is easy, so easy, in fact, you tend to do it rather carelessly. This isn’t meant to impugn the thoughtfulness of wealth managers. It’s just a fact.

--Investing millions of dollars is hard work. There are only so many places you can put it. It’s a little like catching rainwater in pans, buckets, and brandy snifters. Even though you’re happy to have it, after awhile, you run out of places to catch it. Eventually, you sit and watch as the ground soaks it up or it simply disappears down the drain.

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