Despite outflows, Coronation is a cash cow
But the fund manager’s core business of SA pension fund portfolios is in structural decline
As the only large fund manager that is listed in its own right, Coronation Fund Managers subjects itself twice a year to the scrutiny of its peers.
Sometimes it ducks information it might like its investee companies to provide — for instance, it won’t tell you what the investment team is earning, only what CEO Anton Pillay and finance director John Snalam take home.
But no-one can say it doesn’t take its fiduciary responsibilities seriously.
Pillay is particularly angry about the way the shop was misled by the reports on Steinhoff on which it relied for investment.
As a wealthy company with deep pockets, it is taking legal action against Steinhoff and, where legally possible, any other parties complicit in any wrongdoing. Once its legal due diligence is complete it will decide which course of legal action is likely to yield the best outcome for its clients, says Pillay.
Coronation was not the only fund manager to be duped by Steinhoff: according to the Alexander Forbes Equity Manager Watch, it was 14th out of 24 managers over the past four months.
Coronation results give important indicators of industry trends. With annualised earnings of R1.56bn it has the highest profit of any of the large managers that publish results — higher, for example, than the SA portion of the Investec Asset Management results of about R1.1bn.
But an estimate of Allan Gray’s fee income and costs indicates Allan Gray is even more profitable.
On a per-employee basis, however, Coronation would come out tops as it has 319 employees compared with more than 1,200 at Allan Gray.
Usually asset managers can rely on rising asset prices to drive their revenue and profit, as long as they keep costs in check. But there was no such benefit for Coronation Fund Managers in the six months to March, as the all share index was up just 1%, and the MSCI world index, in rand terms, was down 8.6%.
Only fixed interest, where Coronation has a relatively low market share, did well, with the all bond up 10.5%.
Pillay says that even though the closing assets under management (AUM) was down 2% to R588bn, average AUM was up 6% and revenues increased by 7.4% to R2.1bn. He admits that Coronation’s core business of SA pension fund portfolios is in structural decline as outflows — from resignations, retrenchments and retirements — exceed inflows by about 40%.
Over the six months there were net outflows of R11.1bn, almost all of it structural.
This was an improvement from the year to September 2017, when there were outflows of R43.7bn, some of it from clients such as Alexander Forbes Investments. There should be overall inflows as soon as Coronation has reopened its SA equity and balanced portfolios. For several years it believed that having too large an asset base would restrict its room for manoeuvre and turn it into an index hugger.
Pillay says institutional decision making is slow, but the house certainly has an impressive record. Its Houseview Equity product has given a 2.5% excess return, or alpha, every year, while the Global Balanced Fund has given inflation plus 10%.
Coronation still vies with Allan Gray to be the largest unit trust provider, and even after outflows of R1.4bn it still has R233bn under management. Pillay says this was an improvement on the previous financial year, when R6.9bn seeped out.
Coronation pays out virtually all its earnings, retaining a nominal 0.4c/share of earnings and paying the remaining 223c.
It is an entirely different philosophy from its two main domestic rivals.
Investec is expanding its offices in New York and Hong Kong. Allan Gray has expanded into the linked product business in SA and insources its administration.
Pillay describes Coronation as a tight ship.
It runs largely on a variable cost model, with quite low basic salaries and discretionary bonuses, and it outsources administration: asset administration (such as keeping the share register) to JPMorgan, and the transfer agency, or unit trust ownership record, is being moved from Maitland to a new black-owned business, Intembeko.
Pillay says Coronation’s main growth path will be from overseas. It already runs R60bn of assets for foreign clients but manages the portfolios from Cape Town. Its main success so far has been the Global Emerging Markets Fund, but African Frontiers and Global Managed have picked up business. It will start marketing its Global Equity product once it has sufficient track record behind it.
Coronation has only limited exposure outside long-only listed equity, though it runs a handful of small hedge funds.
Old Mutual Investment Group (OMIG) and Sanlam Investments (SI) both make around R1.5bn/year but have entirely different profiles. SI derives a quarter of its earnings from the quasi-merchant banking activities of Sanlam Capital Markets and a further 10% from its successful private client operation.
OMIG seems to have an impressive operating profit of R1.62bn, but R728m comes from wealth management, which includes the sales of investment policies to the wealthy, and just R224m is derived from the long-only asset manager, which is overshadowed by the
excellent alternatives (private equity and infrastructure) business bringing in R277m and by Omsfin, a Sanlam Capital Markets wannabe, with R394m.
For now Coronation remains the only listed large manager, with a franchise that should ensure that even with multibillion-rand outflows every year it will be a cash cow.