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Trujillo and Mohl read the same manual |
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Trujillo and Mohl read the same manual
AMP chief executive Andrew Mohl and Telstra chief executive Sol Trujillo both announced their profit results last Thursday, which was fitting, because the groups have more in common than you might think.
Both are market leaders: AMP in financial services and funds management, and Telstra in telecommunications. And both face a long-term trend of falling prices. The challenge is for them to deliver profit growth despite that trend - and both are leveraging their market leadership and scale to achieve it.
Mohl is in front. The group's retreat from its disastrous UK expansion is just about over, leaving AMP focused on Australia. Margin pressure is a given: Mohl said on Thursday, for example, that revenue from funds under management in Australia declined as a percentage of funds under management by 9 basis points in 2006 to 191 basis points, or 1.91 per cent.
Corporate superannuation was the fastest-growing funds management sector in 2006, and that shaved 6 basis points off margins as AMP took on more of that lower margin work, but margins are steadily eroding anyway as the industry competes on price and client funds grow, pushing them into lower margin categories.
Mohl got around the problem by growing the size of AMP's pie - average assets under management in Australia grew 25 per cent in the year and total assets under management grew 17 per cent - while holding AMP's controllable cost base steady. The result was expanding profitability: controllable costs declined as a percentage of funds under management here, by 19 basis points to 69 basis points, and operating earnings as a percentage of funds under management rose 2 basis points to 54 basis points. AMP's total operating earnings rose 16 per cent to $752 million.
One key is that Mohl has leveraged AMP's scale in this market and simplified its systems so that, for example, its retail super products and its corporate super products in Australia are run on the same platform. A second key is that AMP has restored its credibility as a funds manager and is now a top quartile performer.
The group's underlying return on equity rose from 6 percentage points to 31 per cent, reflecting the fact that AMP is part life insurer, part modern funds manager. A fair average return on life insurance assets is 12 to 14 per cent, and pure funds management businesses achieve more like 50 to 60 per cent. AMP sits in between, but funds management is growing its share of revenue and profit, so returns should rise over time, starting with a jump to more than 40 per cent this year. |