Some Australian-listed financial services companies would get a double lift as the economic cycle swung into improvement mode and smaller competitors fell by the wayside amid a raft of upcoming regulatory changes, a high-conviction fund manager said yesterday.
"We think it's a sector that's very attractive at the moment because of the poor sentiment," Hyperion head of Australian equities Joel Gray said.
Gray said Hyperion favoured fund manager Platinum Asset Management and broader financial services groups AMP and Macquarie Group, as well as IRESS Market Technology.
"Their valuation levels are quite low and their earnings are depressed as well," Gray told InvestorDaily.
"At some point over the next five years, we think you'll get the double [positive] of an improvement in profit levels because they're directly linked to market levels, and a re-rating of those companies."
Wealth managers have been grappling with shrinking pools of funds as a result of prolonged market volatility in the wake of the global financial crisis, unprecedented growth in self-managed superannuation funds and the prospect of rising costs in the run-up to the government's Stronger Super and Future of Financial Advice reforms.
However, Gray said the reforms would eventually contribute to the earnings streams of larger players in the sector.
"Costs will go up but bigger companies will gain market share as smaller competitors fall away," he said.
Hyperion's overall investment strategy targeted businesses that delivered high returns on capital with some sort of competitive advantage, he said.
"We look for strong value propositions. That's at the heart of everything we do," he said.
He said current valuations of about 12 times earnings signalled a relatively poor earnings outlook for fiscal 2012, but Hyperion disagreed with the overall market's view.
"We focus on high-quality companies. We're not only expecting our earnings to be maintained, we're expecting them to grow," he said.
