value and opportunity

A few days ago, Ashmore issued their 2016/2017 annual numbers and annual report. Ashmore was my first Emerging Market investment three and a half years ago and I think it makes sense to check and update the investment case.

Performance so far was not exciting. Including dividends, I earned around 21,6% over those 3,5 years in GBP, in EUR around 12,7%. Compared to my overall portfolio performance of ~+48% in the same time period, Ashmore was clearly a underperformer.

This is how I justified the potential investment case back then:

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.

So implicitly I assumed that a depressed earnings level  would be  ~0,24 GBP/share and that the multiple would expand to a “normal” level along the way. So let’s look how earnings developed (source Bloomberg,  non-diluted)

FY	EPS	YoY % EPS
06/07	0,137
06/08	0,21	53,3%
06/09	0,171	-18,6%
06/10	0,239	39,8%
06/11	0,28	17,2%
06/12	0,268	-4,3%
06/13	0,30	11,9%
06/14	0,195	-35,0%
06/15	0,203	4,1%
06/16	0,193	-4,9%
06/17	0,25	29,5%

Obviously my estimates were too optimistic. The “depressed” earnings levels were much lower and even now, after a pretty good run for Emerging markets, earnings are only 0,25 GBP/share (and this amounts includes some one-offs).

So why did business develop so badly ?

Assets under Management development

	AUM	yoy
2013	77,4
2014	75	-3,1%
2015	58,9	-21,5%
2016	52,6	-10,7%
2017	58,7	11,6%

The table shows quite clear that when I bought into the stock in 2014, AuM were still relatively stable but then especially in 2015 and 2016 AuM fell quite dramatically by a combination of outflows and negative performance. In 2017, AuM required, with a net inflow of around 1,7 bn, the remainder of the increase was performance related.

Fee development

Another headwind were clearly fees. If we look at the past years we can see a steady erosion of  regular management fees which only stabilized in the last year (based on my own calculations, ex performance fees):

	avg AUM	mgt. Fees	in %
2010
2011	50,55	250,9	0,50%
2012	64,75	302,6	0,47%
2013	70,55	316	0,45%
2014	76,2	283	0,37%
2015	66,95	250,2	0,37%
2016	55,75	197,1	0,35%
2017	55,65	226	0,41%

It is no secret that even in the Emerging Market bond space, index funds and ETFs are gaining traction and put pressure on fees in the sector. In 2017, fees seem to have stabilized.

In their investor presentation on page 7, Ashmore shows different fee levels but a further decrease in underlying fees by around 4 bps. So I think it is realistic to assume that management fees will most likely not increase but rather stay where they are.

Other observations:

What I find very positive is the fact that personnel costs indeed follow Ashmore’s philosophy of pay for performance. 2017 salaries are still below 2011 levels despite a significant increase from 2016. This clearly protected the results. Plus, a significant part of 2017 salaries was in shares.

The 2017 result contains a relatively significant amount of realized gains from the investment portfolio which should be not assumed to be permanent. The same goes for a rather high amount of performance fees.

Realistic earning assumptions:

Based on the 2017 accounts, I would adjust Ashmore’s underlying earnings as follows:

2017 P&L		as is		adjusted
			adj
Mgt. Fee		226,0		226,0
Perf. Fee		28,3	-14,15	14,2
other		2,7		2,7
Distribution cost		-4,6		-4,6
FX		5,0		5,0
Revenue		257,4		243,3
Gains /Losses inv sec		22,4	-22,4	0,0
delta 3rd party interest		-12,5	12,5	0,0
Personnel		-67,8		-67,8
other		-32,9		-32,9
OP		166,6		142,6
Finance income		38,6	-25	13,6
others		0,8		0,8
EBT		206,0		157,0
Tax		-36,7		-28,0
NI		169,3		129,0
per share		0,2375		0,1810
Price		3,5		3,5
P/E		14,7		19,3
Excess cap p.s.		0,63		0,63
P/E		12,1		15,9

So this table tells us that with a more conservative approach to the investment result and performance fees, Ashmore looks fairly valued, even including the excess capital.

Summary:

Ashmore is an interesting case. I still like the company very much but it seems that I clearly overestimated the underlying earnings power of the company. In the absence of significant gains in Emerging Markets securities, the company looks fairly valued without a significant upside at a current price level of around 3,5 GBP / share.

In comparison to Record Plc, the business looks more volatile and I also don’t see any potential structural tailwinds. Rather the opposite, if for instacne they have to pay for research out of the shareholder’s pocket.

I am pretty sure that Ashmore could be worth more in a strategic transaction, but for me this would be a very different investment case.

Therefore I sell my 3% position at current prices.