Asset managers struggle to keep an even keel

It’s a tempest out there on world markets.

Despite last week’s dizzying rally, the outlook remains unpredictable and the clouds of recession and inflation linger. The turbulence is especially acute for companies making their money off the markets — like asset managers.

Returns have been lacklustre over the past year following a breather after Covid. Obviously, there are still listed gems to be uncovered, and most asset managers, in following the promises of their investment mandates, are trying to find these in the hope of delivering benchmark-beating returns. This quest is central to the performance fees they charge for their efforts.

The problem is also that battered investor confidence manifests in lower capital inflows. Combine that with subdued, or even negative, returns on existing assets under management (AUM), and management fees suffer a double whammy.

“Asset managers make their money off AUM and the fees they charge,” says Neelash Hansjee, fund manager at Old Mutual Invest. “This year, the markets came off significantly and subsequently AUM declined.”

It’s the principal reason for the extremely depressed share prices of two of South Africa’s premier listed players — Coronation and Ninety One. Over 12 months, Coronation’s share price has dropped more than 36% — dramatically worse than the 4% gain for the JSE all share index.

That puts it on a historic p:e of eight. Yet its reliable dividends mean the company boasts a dividend yield of 12.6% at its current price. (That’s even more than longer-dated South African bonds, which yield in the order of 10.7%.)

But, as Hansjee tells the FM, Coronation is the listed asset manager most exposed to South African equities. That’s clear from its full-year trading statement released last month, in which it warned of a 20%-30% slide in earnings for the year ended September. Tellingly, Coronation’s AUM dropped to R574bn at end-September from R625bn just six months earlier.

PSG Konsult is another local asset manager, but with a large focus on wealth management. Its share price is down just shy of 5% over the past year, putting it on a historic p:e of 17.

The company reeled in R8.3bn of new funds during the six months to end-August; no small feat in turbulent markets. And unlike Coronation, it makes the bulk of its revenue from managing the assets of wealthy clients. Its own asset management arm, PSG Asset Management, with about R41.9bn AUM at end-August, is small when stacked up against Coronation. 

You look for companies that can attract flows

—  Neelash Hansjee 

“You look for companies that can attract flows,” says Hansjee.

PSG Konsult certainly surprised the market in this respect.

Then there’s UK-based Quilter — an Old Mutual spin-off. The company, which relies on its digital platform to service its own and independent financial advisers in the wealthy UK market, eked out £200m in new inflows in the three months to end-September — despite the UK’s tumultuous post-Boris Johnson market environment. Paul Feeney, who left Quilter after 10 years as CEO at end-October, refers to it as “an unprecedented year”.

Meanwhile, Ninety One has been unable to dodge sour markets. Last week, it said AUM had declined to £132.3bn at end-September from £143.9bn in March. For the six months to end-September, the company’s headline earnings per share were down 5% and it suffered £3.2bn of outflows. Over the past year, Ninety One Plc’s share has dropped almost 15%. 

The only hope for asset managers, according to Hansjee, is a turn in the markets. This will largely be driven by what happens in the US.

“Has US inflation or interest rates peaked and is the outlook for them moderating? That can change the market’s outlook and performance,” he says.

Until then, and even though they’re cheap, expect asset managers’ portfolios and share prices to remain under pressure.