Market turmoil, driven by Russia’s war, rising inflation and a sell-off in developed-market equities, hasn’t left Anglo-SA fund manager Ninety One unscathed. Yet despite a less than rosy outlook for upcoming revenue growth (derived from management and performance fees), the company’s expansion plans remain bullish.
“Our top concern is the markets, which are very volatile,” Hendrik du Toit, founder and CEO of Ninety One, tells the FM. “It is difficult to give clients the high alphas [above-market returns] they expect. [And] investors may become more afraid and invest in cash.”
With below-inflation returns on cash and subsequent meagre fees, fund managers traditionally suffer when investors flee into cash holdings at times of volatility and market fears.
“No-one knows how long this war will continue,” Du Toit says, “or to what extent it will influence investors’ perceptions of emerging markets in the near term.” In a recent radio interview Du Toit admitted that he had been wrong in thinking that Russia would never go to war with Ukraine.
As a proxy of emerging-market stocks, the MSCI emerging markets index has slumped 16.1% since the beginning of the year, though it has done fractionally better than the MSCI world index, which is down 18.6%.
Lower performance fees are already starting to hurt — no less in Ninety One’s own share price, which has had a torrid few weeks in comparison to its former parent, banking group Investec. The fees fell 31% to £31.1m in the year to end- March from a year earlier. On the flipside, and thanks to strong fund inflows during the fiscal year, asset management fees rose 13% to £632.8m.
That’s despite the fact that Ninety One’s average fee rate — what it charges investors — is down. As a percentage of assets under management, fee rates slid to 45.7 basis points (BPS) from 46.8BPS. This compares with an average fee rate of about 69BPS at competitor Coronation Fund Managers, which had R625bn under management at end-March, compared with Ninety One’s £143.9bn, or almost R3-trillion. This shows the benefits of scale. CFO Kim McFarland, who joined the company in 1993, said in the results presentation that management and performance fees will be under pressure this fiscal year.
Yet assets under management (AUM) grew 10% from the year before. Of the £13bn’s worth of change in assets, £5bn was attributable to new inflows and £8bn to market and forex changes. Managing these funds cost 9% more, at £433.5m, driven by a 9% jump in salaries and a 10% increase in other business expenses. This compares with the UK’s 7% inflation rate for March and SA’s 6.1% for the same month. This left the company with an after-tax profit of £205.3m, or 33% higher than the previous book year.
In contrast, Coronation’s average AUM grew 8% to R646bn, though the group saw outflows equal to 2% of its AUM. The group this week posted a 22% drop in half-year headline earnings, to 199.1c a share, with fund management earnings down 12% to 214.8c. It cut the dividend by a similar margin, to 214c a share.
While Ninety One has deep roots in SA and the UK, it’s not exactly a household name in other markets. Du Toit is placing his bets on China and the US. “China isn’t uninvestable,” he says. The company has a presence of about 50 people in Hong Kong and now aims to tackle the mainland.
But the US market, which is arguably the most sophisticated investment market in the world, will probably be a harder nut to crack. Still, “this is where the big prize is,” says Du Toit. Ninety One already manages about £11.1bn in North American assets. This geography had the second-highest net inflows of £1.55bn last year — just shy of the £1.8bn inflows from the client group in Africa (mostly SA).
Du Toit is banking on Ninety One’s in-house expertise to tackle the US market, where passive retail investing together with cheap investment platform trading has blossomed over the past decade. Wealthier clients with an appetite for value stocks will probably be in the company’s sights. “Last year you only needed to buy five stocks [in the US],” he says, referring to growth-driven equities such as Amazon, Meta and Microsoft. “The world is changing right in front of our eyes.”
In addition, Du Toit expects the thematic turn to sustainable investing to pay off. Nazmeera Moola, former head of SA investments at Ninety One, was appointed as the fund manager’s chief sustainability officer in November. “This movie has just started,” Du Toit says.
However, new fund inflows may come under pressure this year. Rudi de Cöning, equity analyst at M&G Investments, tells the FM: “Flows are likely to be challenged, given the bearish sentiment. But this affects the entire investment sector, as market participants aim to lock in returns — a treacherous undertaking in volatile markets, as many miss the recovery. Looking across market cycles, Ninety One has a proven ability to deliver alpha and to attract flows.”
Meyrick Barker, equity analyst at Camissa Asset Management (formerly Kagiso Asset Management), shares this outlook: “Investors often respond emotively to market moves and typically become cautious during periods of market stress, resulting in fewer flows being invested into the market.”
A fixed payout policy is still not on the cards for the company
In the meantime, investors in Ninety One can cash in on rising dividends: the group declared a dividend of 7.7p per share, raising its full-year payout 16% to 14.6p, or equal to 76% of adjusted earnings per share. This compares with Coronation’s dividend policy of 75% of headline earnings. However, says McFarland, a fixed payout policy is still not on the cards for Ninety One. “We won’t sit and defend the dividend.”
But with the market mood as sour as it is, what is the point of buying a company so leveraged to poor sentiment? Ninety One’s share price had dropped 23.4% by May 23, since the beginning of the year, though that compares well with Coronation’s 29.5% slump. Compared with the 2.2% dip in the FTSE/JSE midcap index, however, it’s a grim showing.
But, says Barker: “One of the attractions of the business model is that it offers a broad array of investment solutions. In any market condition, Ninety One is often able to present potential clients with an investment strategy that is performing well.”
Ninety One is trading at a historic p:e of 10.3, with a dividend yield of 6.7% on May 20. In comparison, Coronation trades at a p:e of 7.7 and dividend yield of 12.5%.
“With its full-year results, Ninety One is trading on a very attractive p:e given the stock’s quality in diversification and client-centricity,” says De Cöning.
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