Exquisite timing in Paul Skamvougeras’ Perpetual departure

There’s no doubt this is right – Perpetual’s returns look better than they have in years, boosted by a rotation to value and Skamvougeras’ unique ability to use his influence and pressure to help force companies to make value-accretive decisions – from Boral and Brambles, to Tabcorp, GrainCorp and Iluka.

But equally, it’s impossible to separate the timing of Skamvougeras’ sudden departure from the turmoil that has engulfed Perpetual since chief executive Rob Adams announced the firm’s merger with fellow ASX-listed fund manager Pendal Group, including Regal Funds Management’s attempt to spoil that party by launching a separate bid for Perpetual.

Skamvougeras is yet to publicly comment on the Pendal deal, and did not deviate from that position on Monday. In Perpetual’s statement on his resignation, he described his time 18 years at the group (split across two separate terms) as truly rewarding, and said he left with a strong team in place, strong investment returns and fund flows building.

Sign of discontent?

But within the small and close-knit world of funds management in Australia, the sense that Perpetual’s equities team was deeply unimpressed by the Pendal transaction has been growing stronger by the day.

Skamvougeras’ departure will inevitably be read as the manifestation of this discontent.

To understand why this is the case, it’s important to understand what Skamvougeras has achieved since replacing Williams as head of equities in 2015.

For most of his first five years in the job, Skamvougeras faced notable challenges.

Three key challenges

The first was the seismic shift in investor allocations from active stock picking to passive investing, a trend that has put huge pressure on fund flows and fund manager fees.

Australian fund managers have an extra challenge from the ever-increasing size of superannuation funds, which has allowed these institutions to take their investment management in-house – and away from stock pickers who had previously ridden this gravy train for all it was worth.

The second challenge was the changes at Perpetual itself. Over the past 13 years – which encompasses 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 gone on to start or join rival firms, typically taking some funds with them.

Skamvougeras’ third challenge was the market itself. Easy monetary policy since the GFC underpinned a rotation to growth stocks (particularly in technology) that made it difficult for a value manager in the Australian market (which is heavy on cyclicals and light on tech) to outperform.

Numbers from Citi tracked the equities team’s battle. In the middle of 2017, 60 per cent of Perpetual’s funds ranked in the top half of industry returns over one year, and almost 90 per cent were in the top half of returns over five years. But by 2019, only 20 per cent of Perpetual funds were in the top half of industry returns over one year, and less than 50 per cent over five years.

But Skamvougeras stuck to both his value-focused investment process and his combative style, applying pressure to board and management teams – aggressively if he thought they weren’t delivering for shareholders.

Shareholder activism

It was Skamvougeras who led the campaign for Tabcorp to demerge its lotteries business. It was Skamvougeras who pushed Boral to undo its ill-fated push into the United States, and for the Stokes family to lift its takeover for the building materials group. He helped cajole Iluka to spin off its valuable iron ore mining royalty and helped put casino giant Crown Resorts in play, leading to a rich takeover deal that succeeded despite a regulatory firestorm. More recently, it was Skamvougeras who led the campaign against Brambles’ $950 million into plastic pallets in the US.

With interest rates rising and FOMO markets a thing of the past, Perpetual’s value-focused style is delivering again; the flagship Perpetual Australian Share Fund is now beating its benchmark over one, two and three years, with 92 per cent of equities strategies beating their benchmarks over three years

But now Skamvougeras, the architect of that turnaround, is on his way out the door, to be replaced by deputy head of equities Vince Pezzullo, a 26-year veteran of the firm.

Lafitani Sotiriou, senior analyst at MST Emerging and an outspoken critic of Perpetual’s merger with Pendal, says Rob Adams has “spectacularly miscalculated” the level of dissatisfaction inside the Perpetual equities team about the Pendal deal and now “Perpetual Investments key man has walked”.

For Sotiriou, the departure of Skamvougeras is material enough to Perpetual’s fortunes that he believes the scheme of arrangement that facilitates the Pendal merger may need to be delayed to allow Pendal shareholders to consider the implications.

He even suggests that Pendal could look to recut the deal “given Perpetual Investments Australia’s team is a key part of earnings”.

Broadly, the view inside the Perpetual equities team is they have brought the same lens to Perpetual’s merger with Pendal as they bring to any other deal – big acquisitions and mergers deserve intense scrutiny.

The idea that the board would give Adams the green light to do a massive acquisition when there are still questions about his previous deals – most prominently the 2020 acquisition of Barrow Hanley, which has seen assets under management fall by around 20 per cent in the last 12 months – is something that Perpetual’s stock pickers are said to be struggling to get their heads around.

And Skamvougeras’ departure would appear to suggest their views are not making much of an impact on the thinking of the board.

Skamvougeras can feel pleased that he leaves Perpetual’s equities team in good shape, having lifted returns, got fund flows going the right way and developed a succession plan that has been heartily endorsed by the leadership team and board, given he will be replaced by his deputy.

But the implications of his departure for Adams and the Pendal deal are less clear. As Sotiriou asks, will other equities team members also depart? And could this threaten the make-up of the deal? Perpetual insiders are relatively relaxed about this prospect, particularly given the court approvals that kick off the scheme of arrangement are set to be given on Monday afternoon.

In a note to clients, Sotiriou suggests that one solution to the “hot mess” that the Perpetual/Pendal deal has become may be a break-up – Pendal could get Perpetual’s international business, Regal could get Perpetual’s Australian business and there would be natural buyers for Perpetual’s trust and private clients divisions.

A lot of water would need to go under the bridge for something like this to eventuate. But it might just be the sort of value-accretive deal that Perpetual’s stock pickers love.