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Perpetual goes on US shopping spree to buy earnings growth

But it seems the potential for product distribution is the reason Adams is so excited about the deal. Barrow Hanley has been lacking expertise in this area where Perpetual has beefed up its bench strength in international and US distribution over the past six months – a move it seems to have made in anticipation of an offshore acquisition.

It’s fair to assume the growth in earnings would surely be in the bag for the first year post-acquisition but how that pans out over the longer term is difficult to guarantee.

While the deal has many positive elements, more broadly the acquisition by one challenged value funds manager of another challenged value funds manager looks like doubling down on a business with structural problems.

High quality value asset management still has a role to play even if value isn’t the flavour of the moment.

Perpetual chief executive Rob Adams

Both these investment management companies have been leaking funds under management for years as investors have chased growth over value and been amply rewarded for it. Whether the enhanced distribution will prime the revenue pump longer term remains to be seen. There is little benefit in improving distribution if the demand for the product falls.

Not surprisingly Adams doesn’t subscribe to the view that value investing is dead or in structural decline. “High quality value asset management still has a role to play even if value isn’t the flavour of the moment,” he said on Monday.

“It just so happens that value management hasn’t been the flavour for 10 years.”

So when does out of flavour turn into a structural decline?

“When we can no longer add value – when you think the world is only going to grow and when you think valuation doesn’t matter. We think valuation absolutely matters. We don’t think we are going to be in a straight line growth of economies and markets for the next 10 years as there has been for the last 10.

“In the hundreds of years of economic cycles that’s not what happens. It’s just been a really long one,” he said.

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He said the success of this deal and the forecast earnings increase (annualised earnings accretion of 20 per cent) is not solely dependent on value investing coming back into vogue. But logic suggests that it would certainly help.

And Perpetual can’t bag any synergies from this deal to boost earnings because having acquired 75 per cent of Barrow Hanley there won’t be many or any.

Value managers traditionally hit their stride in bear markets that give them access to good companies whose shares have been sold off. The 2000 tech wreck and the global financial crisis, and the large scale fall in the market during March were three significant periods over the past 20 years when value had a chance to shine.

Adams talks about some green shoots coming through in the returns from value managers – although he says this did not inform the decision to buy Barrow Hanley – the negotiations for which began in September last year.

Value investment should in theory carry less risk because it removes the downside of overpaying for shares. But it also often removes the manager’s ability to invest in emerging companies – which have not yet begun to earn money. And these are the companies that fall into the category of growth stocks.

The green shoots to which Adams refers are coming from a recent $10 billion uptick in client interest in the Barrow Hanley pipeline. Not all of this will come to fruition so it’s early days yet.

Meanwhile Adams admitted that the March quarter was tough for value managers and while April and May were a bit better, June was tough again.

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