Not Quite A Price War
Superannuation Platform HUB24 (ASX:HUB), along with its peers in the sector saw some selling pressure on the back of announcement from a larger rival that cut fees on its super platform. That said, we take the opportunity today to review whether the market’s reaction was warranted or excessive.
What’s New?
Since our last coverage of HUB24 in March (FAT-AUS-866) when we looked at the company’s interim numbers, the company showed continued momentum and was well on track to close the year with explosive growth across its business segments.
Since then, the company has issued a few more trading updates relating to the funds under administration (FUA), which we will also review, however, a salient update to date has been a press release last week (23 July) from the much larger rival, BT Financial Group (BTFG), which is the wealth management arm of Westpac Banking Corporation (ASX:WBC).
The press release covered the announcement that BTFG has cut prices on its superannuation platform and that new customers would now pay only a 0.15% asset-based administration fee that is capped once assets reach A$1 million. There is also a flat account fee of A$540 per annum. Though the announcement covers only new customers, BTFG also announced that existing accounts can switch to the new fee structure.
Source: BT Financial Group Website
Unsurprisingly, this led to the market rerating the entire superannuation platform sector and placing selling pressure on many other players such as Netwealth (ASX:NWL) dropping circa 22% from prior to the announcement and affected others like Praemium (PPS.ASX) (-13%) and HUB24 (-18.75%) as well.
BTFG CEO, Brad Cooper even commented that the intention of this is to “completely simplify” the pricing of investment services and to make it “easier” to compare. However, we disagree as this looks like a strategy to gain market share.
As we all know; the devil is in the details and a deeper analysis tells a completely different story.
We look at the company’s Product Disclosure Statement (PDS) to separate the wheat from the chaff. The graphic below shows BTFG’s PDS where the details are itemised.
Source: BTFG Panorama Super PDS
Looking at the boxed sections show that the marketing is consistent with the actual fee schedule though the sizable Expense recovery budget at $95 plus a 0.03% pa based on the super account balance wasn’t highlighted.
Now, we look at HUB24’s PDS and this is summarised in the graphic below:
Source: HUB24 (ASX:HUB) PDS
Indeed, despite not highlighting all details BTFG’s pricing does look more streamlined considering HUB24’s pricing model is tiered and adjusts relative to the investment account size while the differences in the models make comparison somewhat difficult.
Fortunately, regulators require PDS disclosure to make comparisons easier, though this includes assumptions which may not be reflective of an investor’s circumstance. Nevertheless, this should make differences clearer. The graphic below shows a concrete BTFG case:
Source: BTFG Panorama Super PDS
While HUB24’s is presented below:
Source: HUB24 (ASX:HUB) PDS
Thus, it is pretty apparent that BTFG’s price isn’t entirely as friendly to investors ($770.60 vs $544) t at first glance as it also included some other costs such as a higher expense recovery multiplier as well as a higher indirect costs, though admittedly, the examples had different cash estimate but the differences in rates (2.1% vs 1.2%) are very stark indeed.
One can argue that the fixed cost model does imply lower fees as the investment amount scales up and this is confirmed as we do a simplified model to show curve of the fee schedules. This is shown in the graphic below:
Source: Fat Prophets, Company Data
It is apparent that, as investment scales up, HUB becomes more “expensive” than BTFG but we want to redirect the attention towards the red boxed area which shows fee levels for account sizes below $100,000 and which is in fact, more reflective of the average Aussie. As a side note, for investments over $2 million, HUB24 (ASX:HUB) also offers substantially lower fees and are capped at $5,150 pa whereas BTFG doesn’t appear to have the same offering.
The latest data from The Association of Superannuation Funds of Australia (ASFA) reflected in the graphic below show that an overwhelming majority (~80%) of the population do have account sizes below $100,000:
Source: ASFA Superannuation Account Balances by Age and Gender October 2017 Report
This means that for the average investor, having their super in the BTFG platform would end up costing them more compared to having it with HUB24 (ASX:HUB). Though, the marketing department can argue that these differences “are too small” and shouldn’t be the focus as retirement is far away for many.
However, an elementary understanding of compounding mathematics would show that these “small” percentage differences have pronounced effects in the long run. A basic example, outlined below, where if one would invest A$5,000 a year for a retirement 30-years away with an average return of 6% a year before fees and fund costs of 2.1% of the would give a return of A$279,590.
Source: Financial Times Compounding Calculator
However, just by cutting out a “small” 0.5% in fees would lead to a total portfolio value of A$383,200, a sizable 27% difference. This brief example proves that fees are ultimately a major consideration for the investor.
Now, the point of this comparison is that BTFG’s fee structure isn’t exactly as low as it may appear initially, though it is more streamlined compared to a tier structure. HUB24’s investment offerings are still attractive especially towards advisors working with more modest accounts.
That aside, we also believe that HUB24 (ASX:HUB) has other advantages in its favour such as having superior UI (user interface) based on the latest Investment Trends 2017 Platform Competitive Analysis and Benchmarking report showing that compared to peers (19 other platforms), the company ranked 1st for the third consecutive year. This adds “stickiness” in our view.
June Quarter Trading Update
We now move on to the company’s 4Q18 Trading Update. As the graphic below attests, the company has ended another year on a strong note recording its second highest on record net inflow of $739 million and bringing FUA to $8.34 billion, up 51.2% year-no-year. The company has also brought in a much larger host of advisers now numbering over 1,200, up 33.8% year-on-year and these figures are summarised in the statistics below:
Source: 19 July 2018 Trading Update
Note that the highest net inflow on record was the 4Q17 period last year which brought in $841 million though this, in our view, was a one-off thing having benefitted from regulatory changes. On that note, there are underlying trends set to benefit the sector with 3 out of 4 major banks (except WBC) in Australia have announced plans to exit wealth management leaving the market to be picked up by superannuation platforms such as HUB24.
Source: 19 July 2018 Trading Update
Given this and provided the market maintains it’s strength and the BTFG’s price cuts have a less of an actual impact, we believe net inflows will remain sustainably high.
Turning to the charts and with reference to the monthly chart, the long-term uptrend remains intact overall. Previous all-time highs have been taken out this year, with prices pulling back to find support around the 61.8% Fibonacci retracement at $11.20. This level will need to hold to avert a move back towards the 50% Fibonacci retracement at $9.00.
On the daily, prices have sustained a steep decline since the May highs, with a drop below dynamic support at $12.58, being the 50 day moving average. Encouragingly, support at the April high of $11.42 has held, but is currently being tested. This stands as a significant level near term.
Summary
Looking at the trends to date, HUB24 (ASX:HUB) is set to end FY18 on strong footing having reported continued momentum in FUA growth whilst benefitting from a high degree of operating leverage. At this pace, the FY18 will likely mark the company’s second year of profit.
The company is continuing to display strong operational momentum, supported by continued product innovation, investment in technology and prudent acquisitions. It also enjoys strong operating leverage and we believe earnings are set to expand at a rapid pace over the longer term, thereby driving shareholder value.
HUB24 (ASX:HUB) is trading on P/E multiple of almost 91.4 times for FY18, falling to 46.6 times for FY19. These are fullish multiples, even allowing for the operating leverage present.
Accordingly, HUB24 (ASX:HUB) will remain firmly held in the Fat Prophets Portfolio.
Disclaimer: As a note to Members we retain buys on Praemium and OneVue which also operate in the platform space.
