Smartshares anchors NZX revenue, platform stays on track Investment News | Investment News NZ

Funds management ended 2023 as the single-largest revenue-generating business for the NZX following a string of recent acquisitions but with some costs and risks ahead.

According to the NZX annual results handed down last week, the funds division comprising Smartshares, SuperLife, QuayStreet and the former ASB superannuation master trust reported top-line income of almost $37 million against about $25.1 million for the next-best operational unit, secondary markets.

Last year secondary markets just held off funds management with respective annual revenues of $25.3 million and $24.5 million.

Funds delivered an operating profit of close to $18.3 million last year and a pre-tax and interest profit of $14.2 million after deducting acquisition costs ($1 million) and amortisation ($4 million).

The 2023 result takes in the QuayStreet purchase from Craigs Investment Partners for the first time, which added about $1.6 billion to the NZX funds under management (FUM).

Over the 12-month period NZX FUM rose from $8.3 billion to $11 billion at the close, driven primarily by QuayStreet and booming investment markets: net flows slumped to $100 million compared to $800 million in 2022.

The NZX report says post-purchase outflows from QuayStreet of about $120 million were below expectations with the manager poised to roll out a suite of ‘enhanced passive’ products in the first half of this year.

Under a distribution deal, the NZX is targeting net funds flows of at least $800 million into QuayStreet by the end of November 2025 from former owner of the manager, Craigs.

If QuayStreet net flows from Craigs hit a top-of-the-range $1.2 billion as at the November 2025 cut-off date, the earn-out provision could see the NZX paying a further $14 million to the wealth manager after originally stumping up $31.25 million late in 2022.

Craigs missed the “required qualifying net FUM inflows” into QuayStreet by November 23 last year that set a maximum first tranche pay-out of $6.25 million if net flows reached $250 million.

But the NZX “expects” the advisory network will make the phase two target with $11.25 million at stake if Craigs delivers $525 million of net flows into QuayStreet products by November 23 this year.

The QuayStreet purchase and the 2022 takeover of the $1.8 billion ASB master trust (at a price of $25 million) added about 25 full-time staff to the NZX funds roster with further hires likely.

Last year the stock exchange also completed the transition of the ASB master trust investments and administration to in-house operations for net ‘synergies’ of about $1.2 million.

In a letter to shareholders, NZX chair, John McMahon, said the group’s fund business “is on a pathway that aims for around $18 – $20 billion of FUM by the end of 2027”.

At the same time, McMahon said the NZX Wealth Technologies platform is on the road to cash-flow break-even by the end of this year with a dozen new custodial clients onboarding.

By December 31, 2023, Wealth Technologies reported 23 clients, all operating on the new platform, and over $11.5 billion in funds under administration (FUA) after picking up about $1.5 billion late in the period from the Fisher Funds-owned Kiwi Wealth private portfolio service – described as an “initial tranche” in the NZX annual report.

As well as the Kiwi Wealth private client book, the NZX platform signed on two other big custodial clients – the Northland advisory firm, Yovich & Co, and the $200 million Cook Islands National Superannuation Fund – and several smaller financial planning businesses such as Ethical Investing and Multiply.

The banner year for Wealth Technologies also included the “first tranche of a large SaaS [software-as-a-service] client, that will later be onboarded to full service custody and operations”.

“We remain confident the growth from the existing contracted transition activity and the new business prospect pipeline should ensure NZX Wealth Technologies meets its objective of being cashflow breakeven by the end of 2024 and will deliver on its longer term target of FUA between $35 and $50 billion,” the NZX report says. “The key risk in 2024 is that the timing of transitioning new business onto the platform is in part controlled by the client, so is therefore subject to their technology roadmap priorities.”

Wealth Technologies reported revenue of $6.8 million in 2023, up about $800,000 year-on-year, and after operating costs earnings of $1.6 million: post amortisation (stepped up this year to $6.6 million) and other non-operational costs, the platform was in the red to the tune of $5 million for the year.

The NZX has spent more than $30 million on Wealth Technologies since acquiring the original Apteryx platform business in 2015 for about $1.5 million.

While the funds and platform divisions grew or showed improving fundamentals, the core NZX stock market operations remained flat over 2023 with net profits for the company as a whole falling to $13.5 million from $14.1 million the previous year. Post results, the NZX share-price slipped to $1 – down about 1 per cent for the day and over 14.4 per cent for the last 12 months.