value and opportunity

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.