Independent asset managers: where to invest?
Fat margins and secure dividends make Coronation and Ninety One a worthy gamble, even in hairy markets
Investors now have the choice of investing in two of the three dominant independent asset managers, Coronation and Ninety One.
The question, though, is, should they?
After all, the most important variable in Coronation’s results, the all share index, was down 18% over the six months to March.
Coronation CEO Anton Pillay says there were outflows equivalent to 5.8% of its portfolio in the half-year and warns: "This can only get worse, as there is a structural weakness in the SA market.
"Outflows from retrenchments, resignations and retirement are higher than inflows from active pension fund members, even in good years."
That’s hardly encouraging stuff.
But, unlike many companies on the JSE, asset managers tend to be faithful dividend payers. And even as other financial services businesses look to preserve capital, they are still paying out.
Coronation Fund Managers paid out almost all its earnings for the half-year to March in a 178c a share dividend.
Ninety One, the former Investec Asset Management, paid a dividend to its former parent company. CEO Hendrik du Toit says that as Ninety One had traded for only two weeks of the reported financial year as a listed company, it is reasonable to expect shareholders to wait another six months for a dividend.
But as the business has £42bn of excess capital, a special dividend will be considered.
Du Toit argues that asset management "remains a high-margin business even in bear markets, as there are high profits once a minimum scale has been achieved".
This is especially true, he argues, for shops like Ninety One and Coronation "which have acknowledged centres of excellence that can demand a premium over generic index funds".
And unlike many businesses that are barely scraping by, both Coronation and Ninety One trade on operating margins of over 30%.
Fortunately for Coronation, client flows were neutral from global clients.
The asset manager has a R68bn book with international institutions, dominated by its Global Emerging Markets Fund, and supplemented by newer funds such as Global Managed (relating to developed markets) and Global Equity Select.
Du Toit says its two home markets of the UK and SA held up well, but demand from the cross-border market has dried up as investors in key markets such as Europe and Latin America stopped investing in equities.
"And we are still establishing our third home market in China, where we will supply a global product and have the advantage of being a neutral and not an American company," he says.
In SA’s unit trust market, where Coronation is neck and neck with Allan Gray to be the largest player, its 2.5% rate of net outflows was in line with the rest of the industry.
Still, overall assets under management fell 11% over the six months to R508bn.
Ninety One’s assets were down by 7% to £103bn, though its average assets under management rose 10%, to £118bn.
In spite of the outflows, Coronation’s revenue was up 8% to R1.77bn and profit after tax also rose 8% to R624m.
It was a similar story at Ninety One, with revenue up 9% to £588m and operating profit up 10% to £190m.
But assets can leave the door at either firm at a day’s notice.
Coronation is more exposed as it has a single team with a single process and an 87% SA client base.
Ninety One is far more diversified, in terms of investment style and geography.
Still, says Coronation chief investment officer Karl Leinberger, "we believe that our clients should get the same experience, within their risk appetite, so we won’t have three horses in the same race".
But Du Toit says there is legitimate demand for different styles from different investors, which is why the shop offers value equities under John Biccard, quality under Clyde Rossouw, and 4Factor — a more blended style — under Chris Freund.
Leinberger says that 98% of Coronation’s funds have exceeded their benchmarks since inception, while Ninety One’s hit rate is 71%. Even so, over 10 years there is little to choose between Coronation and Ninety One’s institutional balanced performance, of 10.7% and 10.9% a year, with only the maverick Foord Asset Management providing equally competitive returns.
Leinberger says there is a lot of value around, but also risk. "All but three of the best dozen local businesses are cheap enough for us to buy. Even in the current environment we are happy to hold Sanlam, FirstRand and Famous Brands. The only three that are still too expensive are AVI, Capitec and Clicks."
Leinberger says the biggest mistake was a high conviction holding in the UK shopping centre group Intu.
"We thought the primary shopping centres would hold their value, but there has been a bloodbath, which has hit not just Intu but also giants such as Hammerson, Simon Group and Unibail-Rodamco-Westfield."
Both businesses also have plenty of skin in the game: Coronation staff own 25% of the company and Ninety One staff hold a 21% share. Ninety One also has the added security of a 25% holding by Investec, a useful defence in a rapidly consolidating global asset management industry. "We certainly aren’t looking for a merger of equals," says Du Toit, "but we definitely won’t exclude some bolt-on acquisitions or employment of new teams. We are still light on expertise in alternatives such as infrastructure and direct property, which make up barely 3% of our assets."
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