There’s no doubt that’s right – Perpetual’s returns are looking better than they’ve been in years, bolstered by a rotation to value and Skamvougeras’ unique ability to use his influence and pressure to coerce companies into making value-added decisions – by Boral and Brambles, is boosted. to Tabcorp, GrainCorp and Iluka.
But equally, it’s impossible to separate the timing of Skamvougeras’ sudden departure from the turmoil that has gripped Perpetual since Chief Executive Rob Adams announced the company’s merger with ASX-listed fund manager Pendal Group, including the attempt by Regal Funds Management to spoil this party by making a separate bid for Perpetual.
Skamvougeras has yet to comment publicly on the Pendal deal and did not deviate from that position on Monday. In Perpetual’s statement of retirement, he described his 18 years with the group (spread over two separate terms) as truly rewarding and said he left with a strong team in office, strong investment returns and building capital flows.
sign of dissatisfaction?
But within the small and tight-knit world of fund management in Australia, the feeling that Perpetual’s equities team was deeply unfazed by the Pendal deal is growing stronger by the day.
The departure of Skamvougeras will inevitably be read as an expression of this dissatisfaction.
To understand why this is the case, it’s important to understand what Skamvougeras has accomplished since he replaced Williams as head of equities in 2015.
For most of his first five years on the job, Skamvougeras faced notable challenges.
Three key challenges
The first has been the seismic shift in investor allocations from active stock selection to passive investing, a trend that has put tremendous pressure on fund flows and fund manager fees.
Australian fund managers face an additional challenge from the ever-expanding size of bond funds, which has allowed these institutions to take their investment management in-house – and away from stock pickers who previously ran this gravy train by any means necessary.
The second challenge has been the changes at Perpetual itself. Over the past 13 years – which includes Skamvougeras’ second stint at Perpetual – the equities team has lost two heads, two deputy heads and one senior portfolio manager. Almost all of these stock pickers have started or joined competing companies, usually taking some cash with them.
Skamvougeras’ third challenge was the market itself. Easy monetary policy as GFC underpinned a rotation into growth stocks (particularly in the technology space) which made life difficult for a value manager in the Australian market (heavy cyclical and low tech). to outperform.
Numbers from Citi followed the equities team’s struggle. As of mid-2017, 60 percent of Perpetual’s funds ranked in the top half of 1-year industry returns, and nearly 90 percent ranked in the top half of 5-year returns. But as of 2019, only 20 percent of perpetual funds were in the top half of industry returns over one year and less than 50 percent over five years.
But Skamvougeras stuck to both his values-based investment process and combative style, pressuring board and management teams — aggressively when he felt they were failing to do justice to shareholders.
It was Skamvougeras who led the campaign for Tabcorp to spin off its lottery business. It was Skamvougeras who urged Boral to reverse his ill-fated foray into the United States and persuaded the Stokes family to cancel their takeover of the building materials group.
He helped Iluka spin off his prized iron ore mining licenses and helped bring in casino giant Crown Resorts, leading to a rich takeover deal that thrived despite a regulatory firestorm. More recently, it was Skamvougeras who led the campaign against Brambles’ $950 million switch to plastic pallets in the US.
As interest rates rise and FOMO markets become a thing of the past, Perpetual’s value-driven style is once again delivering results; The flagship fund Perpetual Australian Share Fund is now beating its benchmarks over 1, 2 and 3 years, with 92 percent of equity strategies beating their benchmarks over 3 years
But now Skamvougeras, the architect of that turnaround, is on his way out to be replaced by deputy equity chief Vince Pezzullo, a 26-year veteran of the firm.
Lafitani Sotiriou, a senior analyst at MST Emerging and an outspoken critic of Perpetual’s merger with Pendal, says Rob Adams “spectacularly miscalculated” the level of dissatisfaction within Perpetual’s equities team over the Pendal deal, and now “the key man of gone to perpetual investments”.
For Sotiriou, Skamvougeras’ departure is so significant to Perpetual’s fate that he believes the arrangement facilitating the Pendal merger must be postponed to allow Pendal shareholders to consider the impact.
He even suggests Pendal could try to repeat the deal as the Perpetual team is a key part of the revenue.
Broadly speaking, Perpetual’s equities team believes they took the same view on Perpetual’s merger with Pendal as they do on any other transaction — large acquisitions and mergers deserve scrutiny.
The idea that the board would give Adams the green light for a massive takeover if questions remain about his past deals — most notably the 2020 acquisition of Barrow Hanley, which has seen assets under management down about 20 percent in the last 12 months – this is something Perpetual’s stockpickers are said to be struggling with.
And Skamvougeras’ departure seems to suggest that her views do not have much influence on the board’s deliberations.
Skamvougeras is pleased to be leaving Perpetual’s equities team in good shape after driving returns, steering cash flows in the right direction and developing a succession plan that has been warmly supported by the leadership team and board, provided it goes through his replaces deputy.
But the impact of his departure on Adams and the Pendal deal is less clear.
As Sotiriou asks, will other members of the equity team leave as well? And could this jeopardize the makeup of the deal?
Long-time insiders are relatively calm about the prospect, especially since the court approvals that will launch the settlement plan are due to be granted on Monday afternoon.
In a note to clients, Sotiriou suggests that one solution to the “hot mess” that the Perpetual/Pendal deal has become could be a split – Pendal could get Perpetual’s international business, Regal could get the Australian business of Perpetual, and there would be natural buyers for Perpetual’s trust and retail divisions.
A lot of water would have to flow under the bridge for something like that. But it could be just the kind of value-added business that Perpetual’s stockpickers love.
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