Australian Ethical FUM down 3%: Still expects growth in FY23

One-time ASX darling Australian Ethical Investment (ASX: AEF) was up 2.20% at the open after issuing underlying profit guidance of between $9.8m and $10.2m which represents a mid-point increase of 9% on the year to 30 June 2021.

With volatile markets impacting investment performance, funds under management (FUM) dropped 3% to $6.64bn over the last two months.

Other highlights of today’s update included positive net flows in April and May, up $150m, while net flows for the financial year to 31 May were $990m, including a $50m institutional redemption, and flat on the prior corresponding period.

FUM still expected to grow

The fund manager has flagged plans by an institutional client to redeem $340m in the Australian Ethical Balanced Fund between June and November this year.

However management notes this only represents around 1.7% of annual revenue, and still expects FUM to grow in fiscal 2023.

Early April, the fund manager announced that its superannuation subsidiary, Australian Ethical Superannuation had entered into an exclusive MoU to explore a successful fund transfer (SFT) of Christian Super members into Australian Ethical Super.

The proposed SFT could see up to $2bn of FUM transferred to Australian Ethical Super in late 2022 or early 2023.

Megatrend momentum

To the uninitiated, Australian Ethical is a fund manager dedicated to providing investors with exposure to investments that align with their ethical convictions.

The fund manager has clearly benefitted from being seen as a flagbearer for the emerging megatrend of green investing.

Growing demand of investors wanting compelling investments that tick the environmental, social and governance (ESG) box, saw the share price climb to a high of around $14.74 last November, before bounding lower to $13.79 by year’s end.

However, since the start of 2022 the fund manager’s share price has sharply unravelled and year-to-date is down -67% to $4.54 which was roughly where it was trading back in May 2020.

What happened?

Not even a 12% increase in underlying profit after tax in its half-yearly results announced back in February – when operating revenues surged 38% to $35.2m – could stop the share price from losing ground.

Despite excellent growth of new customers and net flows, along with solid investment performance, the company appears to have been highly exposed to heightened market volatility with inflationary pressures and geopolitical tensions clearly at the forefront of investors’ minds.

Is ESG now taking a back seat?

While the megatrend that is ESG is by no means over, it may have been, albeit temporarily, put on hiatus while the world figures out how to put a foot on scare resources during serious supply chain issues compounded by covid, war in Ukraine and lockdowns in China.

With so many new players jumping on the ESG bandwagon - including super funds – Australian Ethical is now operating within a much more crowded space.

It’s also likely to Australian Ethical is experiencing some investor wariness to what is now perceived to be ‘greenwashing’.

However, the Labor government’s renewed commitment to renewable energy may by default help to reignite local investor interest in ESG investing across the board.

While consensus does not cover this stock, based on Morningstar’s fair value of $7.40, the stock appears to be undervalued.

Australian Ethical share price over 12 months.