Emerging markets series part 1: Ashmore Group PLC (ISIN GB00B132NW22)

As I have written a few weeks ago, I am trying to extend my circle of competence a little bit with regard to Emerging markets. The first company in this series is Ashmore Group.

Ashmore Group is a kind of “intermediate” step in this regard: They are a UK-based asset manager who specialises exclusively in Emerging markets.

The history of the company is well described on their homepage:

Based in London, the business was founded in 1992 as part of the Australia and New Zealand Banking Group. In 1999, Ashmore became independent and today manages $75.3bn (as at 31 December 2013) across a range of investment themes in pooled funds, segregated accounts and structured products. Ashmore Group plc has been listed on the London Stock Exchange since 2006.

Asset Management as a business

Asset management in general as a business used to be as good as it gets. Asset Management is an “asset light” business model. You collect fees and sometimes even participate if things work out well. Once money is invested, it is often surprisingly “sticky”. So it is no surprise that among the richest people in the world, a surprisingly large number of people are Hedgefund asset managers.

On the other side, “normal” active portfolio management is squeezed from different sides. Cost efficient Index ETFs from one side and hedge funds from the other. Also, with overall lower yields it is clearly more difficult to achieve the same fee levels as relative to the yield they represent a much bigger percentage

Back to Ashmore, this is how they have done historically since they went public:

EPS FCF ROE Net margin
2006 0,14 0,15 62,5% 60,7%
2007 0,21 0,22 60,2% 58,3%
2008 0,17 0,15 39,6% 46,8%
2009 0,24 0,26 47,1% 56,9%
2010 0,28 0,21 43,5% 55,1%
2011 0,27 0,18 35,0% 54,3%
2012 0,30 0,18 34,7% 56,9%

So no complaints here, ROE went down somewhat as equity was built up, but nevertheless it looks like very very attractive business. Compared to those numbers, Ashmore’s current valuation looks like a joke (at 330):

P/E 11.1
Div. Yield 5.35%
EV/EBITDA 7.8
EV/EBIT 8.3
P/B 3.8
Mkt Cap 2.4 bn GBP
No debt, net Cash 500 mn GBP or~0.71 GBP per share

Plus there is more to like:

– the CEO owns 42% of the shares and with an age of 54 not close to retirement
– they seem to have some sort of “Outsider” qualities for instance fixed salaries are capped at 100 k GBP which keeps down fixed costs

But there is of course a reason why the stock is “cheap”:

– clients are pulling money from the funds
– average fees have been declining for 5 years in a row (until recently compensated by higher AuM)
– Performance fees will be low or non-existent for the foreseeable future
– revenues will decrease with falling market valuations for EM

Why I like the company anyway:

+ It is an easy way to “play” the entire Emerging market universe without incurring country specific risk
+ the company does not have any valuable own assets locked in difficult emerging markets, the assets are owned by the clients
+ long-term, EM capital markets will grow
+ EM are difficult to replicate via index ETFs, especially for bonds. Index ETFs are not really a competitor in the EM bond area (too illiquid, to many different bonds per issuer etc.)
+ As an EM specialist, they are much more credible than a large asset management company with some EM funds among many other offerings

Is there a “moat” ?

In theory, setting up any fund management company is relatively easy. Yes, one needs licences but they are easy to obtain. However, Emerging markets are a little bit different. While it is relatively easy to gain exposure to some assets, like EUR or USD bonds from EM issuers, getting access to local markets is much harder. Ashmore with its long EM market experience does have some advantages here, for instance they are the first non-Hongkong based fund manager to get a license to invest directly into the China “On shore” market early this year.

The current problems with EM led already to the exit of some high-profile AM companies from that area, among others, famous hedge fund Brevan Howard closed its once high-flying EM funds just recently.

Ashmore doesn’t have any “star portfolio managers” who might be able to jump to another company and take a lot of client money with them. Still, the single most important factor for any asset manager ist the historic track record. Performance is normally measured both in absolute and relative terms. For many so-called “asset allocators”, relative performance to other asset managers is the most important number. In order to find out how Ashmore scores in this regard, I looked at the publicly traded Ashmore funds. Bloomberg shows the relative ranking of such funds within their category over different time horizons. Those are the results for the traded Ashmore funds:

mn USD 1y 3y 5y fee
Ashmore Emerging Markets Corporate Debt 3690 84% 69% n.a. 1,15%
Ashmore Emerging Markets Liquid Investment Portfolio 3910 78% 96% 81% 1,50%
Ashmore Emerging Markets Local Currency Bond 2340 5% 23%   0,95%
Ashmore SICAV – Emerging Markets Debt Fund 1400 46% n.a. n.a. 0,95%
Ashmore SICAV – Emerging Markets Global Small-Cap Equity 100 86% n.a. n.a. 1,50%
Ashmore Asian Recovery Fund (“ARF”) 224 37% 1% n.a. 1,50%
Ashmore Emerging Markets Total Return 684 32% n.a. n.a. 1,10%
AshmoreEMM Middle East Fund 449 97% 97% 79% 1,50%

The number have to be interpreted the following way: The 84% under the 1Y column for the Ashmore Emerging Markets Corporate Debt fund says that the fund performed BETTER than 84% of all fund in that category , which, by the way is a very very good score. We can see that not all the funds are doing well, but at least the big flagships are doing well and some of the smaller specialist funds. Overall, from a performance perspective, it looks like Ashmore has at least some “edge” in its core mandates which will help them a lot, once money is flowing back into EM mandates.

Funnily enough, everyone knows that past performance is not a very good indicator of future performance, bt the majority of institutional money gets allocated based only on past performance.

How much would I be prepared to pay ?

To keep ist simple, I would think a “full” price for a company like Ashmore would be around 15x P/E. If I could buy it for (cash adjusted) at 10 x P/E based on potentially depressed next 2-3 year earnings levels, this would leave a decent upside.

Current estimates for 2014 are ~ 0,24 GBP per share, including 0.70 GBP net cash per share, this would mean I would be a buyer at around 310 pence per share or some -10% lower against the current share price to give me my required upside. So for the time being I will stay on the sidelines and watch and buy only below 310 pence per share.

As I am not a Chartist it is still interesting to look at the chart:

My target level for the purchase does look a little bit like a “support” level for the stock, which, if broken, might lead to a larger drop in the share price. So for the time being, I will watch Ashmore going forward but wait if either, business turns out to be better as expected or the price drops below 310 pence.

22 comments

  • So the results came in at 18.4 GBp (diluted) which is way below your estimate. Has thesis changed?

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  • First off – we are still very long Ashmore, so take whatever I write with a grain of salt – I am wildly bullish. Now: All value oriented investors in Europe should know who Francisco Parames of Bestinver Funds is. MrParames et al at Bestinver bought 8 million shares in Q1 this year, a new position. That is a good sign, if you ask me.

  • Shareholder Value liest glaube ich bei Dir mit. Nach Positionsaufbau bei Gerard und Nopec, sind sie laut monatlichem FactSheet im Februar bei Ashmore eingestiegen.

    http://www.shareholdervalue.de/management-ag/frankfurter-aktienfonds-fuer-stiftungen

  • Good for you. Zero future growth in FCF is priced in at today’s price. That seems extremely unlikely to me.

    Some scenarios below – pardon the poor formatting here.

    No-growth fair value estimate

    Avg FCF 2011-2013: 182
    Disc rate 10 %
    growth rate 0 %
    plus cash 400
    / no shares 707.4
    NGFV 3.14 GBP

    More likely scenario:

    Low-growth fair value estimate

    Avg FCF 2011-2013: 182
    Disc rate 10 %
    growth rate 3 %
    plus cash 400
    / no shares 707.4
    LGFV 4.24 GBP

    Bullish scenario:

    Free cash flow calculation

    2014 2015 2016 2017 2018 2019
    Sales 350 350 416 466 522 584
    EBIT margin 65.1 % 61.6 % 64.5 % 65.1 % 55.2 % 55.2 %
    EBIT 227 215 268 303 343 388
    EBIT growth rate -5.4 % 24.6 % 13.1 % 13.1 % 13.0 %
    – taxes -57 -54 -67 -75 -85 -95
    + D&A 8 8 8 9 9 9
    – capex -12 -13 -13 -13 -14 -14
    – increase in WC 0 0 0 0 0 0
    = Free cash flow 166 157 197 224 254 287
    FCF growth rate -5.7 % 25.6 % 13.5 % 13.4 % 13.4 %
    Free cash flow yield 7.3 % 6.9 % 8.7 % 9.9 % 11.2 % 12.7 %

    DCF calculation

    Discount rate 10.0 %
    Terminal FCF growth rate 3.0 %
    Forecast period value 739
    Terminal value 2,474
    Net cash/debt 400
    Equity value 3,613
    Shares outstanding 707
    Per share fair value 5.1 GBP

  • bought second clip today, now 2.5% position.

  • We doubled our position today as well.

  • For the record: Bought the first 1% Ashmore clip today at 313 Pence after H1 annoncement.

  • The rise and fall of Artio Global. It should have been added that ASHM lost 35% of AUM during the financial crisis also – after which it recovered to new highs and then some. So ASHM has already been in Artios shoes – and made it out of crisis with flying colors. I think that is more instructive than Artios fate itself.

  • Thank you for this idea.

    You add cash/sh to your 10x estimated eps. Does the company not need that cash to win clients with a strong balance sheet argument, to grow AuM and because of the volatility of their business, therefore is it available to shareholders?

    Why did the management fee margin fall each year from 09-13? In 13 they name “was the result of client and theme mix effects and the influence of large segregated mandate wins”. Or do costs of increasing AuM (support staff expands faster than investing managers) and competition cause this?

  • Thanks for the write-up. I recently did one myself, parts of which are posted on http://www.corenerofberkshireandfairfax.com.

    I think one key issue which is a positive is the make-up of ASHMs AUM compared to other AM cos. It is more sticky IMO, though in times of crisis, ASHM has also seen outflows (-35% during the financial crisis years).

    I would probably disagrre with the reader above on the subject of star PM stuff. Coombs does not actively manage that much of the assets on anything but an overall level as far as I understand it. He heads the investment comittee, which is a different thing. However, there is key man risk here – Coombs keep assets coming and from leaving. But considering the guy’s 54 or something and owns 42% of the company (and says he has no plans for leaving), I’m comfortable with this.

    These types of companies often do have key personell without which the company would probably be mediocre.

    Looking at the numbers, I think it’s important to understand that ASHMS cost structure is extremely flexible. Varaiable comp is the highest cost item…how many businesses can say that. Unlike many pundits who claim to know how assets will not flow to EM in the next 10 years because of some great recovery in the US and Japan and to a lesser extent Europe, I think there is every reason to believe EM flows will be massive. Not in the short term, but over time. Investors are underweight EM assets, and local savings and more sophisticated capital markets will also drive demand.

    I am long ASHM here, but praying for terrible numbers on tuesday so I can double my position (will do so under 3 GBP).

    /Klarmanite

  • Interesting to compare this opportunity with Aberdeen Asset Management, which I think shares some of the same characteristics but is more diversified (positive) and recently plagued by some performance issues in its flagship funds (negative).

    • thanks for the comment. Actually, in order to gain EM exposure, the diversification of Aberdeen would be a negative. Also, the track record of Aberdeen doesn’t look so good. Losses in 2002, 2003 and 2009. I guess their cost structure is less variable than Ashmore’s. Finally, share count quadruppled over the last 10 years. Not a good sign.

  • Very nice write-up, as always, and an interesting company. I would push back on the “no star PM” comment – Mark Coombs, the CEO, is also the key guy when it comes to the investment process as well as the overall business. No Mark, no firm. There used to be other senior PMs below him but they all left in the last 3-4 years, which I think explains a big portion of the outflows. Also, as fund managers, they tend to go a little (or a lot) further out on the risk curve than most of their peers, so they tend to perform poorly during times of crisis and very well on the rebounds. So I would probably argue that this is actually a rather “levered” way to play EM…

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