Ashmore Group (Bloomberg: ASHM LN) is a UK-based, London-listed global asset manager specialised in investing exclusively in emerging markets with offices in London and New York and local operating hubs in Colombia, Peru, Saudi Arabia, UAE, India, Indonesia and Singapore.
Founded through a management buyout led by its still current CEO Mark Coombs, its history is well explained on their website:
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 $78.3bn 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.
Strategies and operations
Ashmore manages capital across a range of dedicated strategies (all numbers are as at March 31):
External debt (US$16.8 billion, 21% of AuM): the first investable asset class to be accepted globally by international investors, it includes sovereign bonds issued in USD and - to a lesser extent - in EUR and other hard currencies from ~80 countries. While today smaller in size than the local currency government bond market, it remains a sizeable asset class with US$1.5 trillion of bonds outstanding.
Local currency debt (US$ 17.0 billion, 22%): the new frontier of emerging markets, it includes bonds issued by sovereign states and denominated in local currencies, thus giving access to a wider spectrum of exposures to the economic dynamics of these countries. It’s a large and growing asset class with US$14.5 trillion of securities in issue.
Corporate debt (US$8.0 billion, 10%): the EM corporate debt universe comprises both hard currency bonds and local currency securities, with outstanding issuance of US$3.2 trillion and US$4.9 trillion respectively.
Blended debt (US$17.7 billion, 23%): a mix of the three previous strategies, it provides broad access to the EM fixed income universe, with active management able to exploit the significant variances in the annual returns of the constituent asset classes.
Equities (US$7.4 billion, 9%): all actively managed, it includes both global funds (small-caps, frontier) and local/regional strategies.
Alternatives (US$1.7 billion, 2%): three main themes: special situations (distressed debt & private equity); real estate; and infrastructure.
Overlay/liquidity (US$9.7 billion, 12%): offers investors the ability to actively or passively manage currency exposure to emerging markets.
As shown above, the company has a wide product offering, but mostly debt-oriented: 76% of AuMs are in credit strategies, with an additional 12% in currency overlays. Segregated accounts (including white-labelled funds) represent ~80% of AuMs, with the rest in mutual funds and SICAVs in both the US and Europe.
With just US$500 million in assets when it was established in the wake of Russia’s debt default, Ashmore has achieved an enormous success over the last 20 years:
In 2011 it also acquired Emerging Markets Management (EMM), another EM-dedicated asset manager founded by Antoine Van Agtmael, who was the first in the 1980s to coin the term emerging markets (considered more respectful than "less developed countries" as they were known until then) when he was Deputy Director of the Capital Markets department of the International Finance Corporation (IFC), the private sector-oriented affiliate of the World Bank. Van Agtmael was named Chairman of Ashmore but then left in 2012. The acquisition, which added over US$10 billion to total AuMs, was made at a price that was only 8x EMM earnings and ~2.5% of AuM.
What is the long-term opportunity?
The typical answers are very basic:
A large portion of the world’s population lives in an emerging country, and already a majority of global GDP is generated in EM, with 75% of world’s foreign reserves controlled by their central banks
Strong drivers of growth and economic convergence to developed countries create investment opportunities
Low index representation and other market inefficiencies offers opportunities for active management, while at the same time rising indexation drives higher allocations as the asset class is increasingly viewed as “mainstream”
Valuations are more affordable than in more developed markets
The “generic” assumption is that the EM fixed income and equity asset classes are large and diversified, but also inefficient. This is manifested in volatile security prices that can be heavily influenced over short time periods by factors other than underlying economic, political and company fundamentals.
The EM investment universe is indeed quite large: the total is approximately US$71 trillion, comprising US$34 trillion in fixed income issuance and US$37 trillion of equity market capitalisation (source: Ashmore Group). Importantly, the majority of securities are denominated in local currencies, with only US$5 trillion of the total representing hard currency sovereign and corporate bonds. But despite the size, growth and vast opportunity set, it remains significantly under-represented in benchmark indices. For example, only 17% of bonds and 22% of equities are included in the main indices, although the representation is higher in the more established, but smaller, hard currency asset classes.
This low level of indexation provides a substantial barrier to entry for passive substitutes: according to JP Morgan, approximately 18% of the US$500 billion of emerging markets fixed income mutual fund assets are in ETFs, a loose proxy for passive AuM; the figure is higher for EM equities at 35% of the US$1.5 trillion mutual fund sample. While both percentages have increased over the past year (from 15% and 31%, respectively), this illustrates that for mutual fund investors there continues to be a strong(ish) preference for active management to access these asset classes.
Significant long-term alpha could therefore be delivered through active management and the expression of high conviction ideas in portfolios, both with benchmark and non-benchmark securities. For example, over the past two decades, the average difference in annual returns between the best and worst performing fixed income asset classes has been more than 1,000 bps and the minimum difference has been 450 bps: an active management approach to blended debt provides investors with the fullest range of potential fixed income investment opportunities.
The reality, however, points to a situation where non-economic factors still massively impact underlying returns. The best definition of an emerging market is indeed from Ian Bremmer: “countries where politics matters at least as much as economics for market outcomes”.
While many predicted a boost to EM assets from Covid vaccines, the opposite has happened over the last few months, with EM debt particularly hit by severe outflows (Financial Times). This is no big surprise: higher inflation, supply-chain issues and rising commodity prices are all huge problems for many emerging market economies which were still struggling to recover from the coronavirus pandemic even before the Russia-Ukraine conflict started (not to mention Chinese “political” interference like meddling in their big tech businesses and the ongoing lockdowns).
For Ashmore in particular, it didn’t help that it placed sizeable bets on Russian assets in the weeks leading up to the invasion of Ukraine in late February; it also held about US$500 million in debt exposure to embattled Chinese property developer Evergrande (Bloomberg).
As it trades as a play on emerging markets, its shares have become more and more unpopular: each small reported outflow in AuMs has been interpreted as the start of bigger problems for the company.
Some financial numbers
First of all, Ashmore is well-capitalised, with liquid resources of over US$1 billion, of which c. US$600 million are in cash: cash alone is approximately 30% of current market capitalisation!
[Note: ASHM is traded and reports its profits in GBP but AuMs are in USD; I’ve converted all number to USD at the current exchange rate].
As for profitability, the two charts below show the situation since the IPO:
ROE has decreased over time because the undistributed profits went to accumulate the equity (the dividend payout is around 65%-70%), but the operating margins are extraordinarily stable above 60% (and profits margins at 55%). As a comparison, BlackRock (I know: much bigger, much more diversified, has grown by several acquisitions and is mostly in passive products…) has ROE of around 15% and profits margins ~30%.
Against these returns, the current valuation is:
P/E (1 year): 12x
P/E (5 years): 10x
Dividend yield: 7.5%
P/TBV: 1.8x
And these multiples have been steadily decreasing over time, although they are not yet at the bottoms touched during the Great Financial Crisis.
So, definitely several pluses….
1. The asset management business is very attractive: asset-light (a rented office and a PC are enough…) with enormous economies of scale and excellent synergies in both costs and revenues. Furthermore, unlike many other sectors, asset managers do not have to compete too much on price, as the commission structure (1% -2% of assets under management plus 10%-20% on performance) is very homogeneous. Once you reach critical mass, financial performance is driven by high-quality revenues with a strong bias to recurring management fee income.
2. Add a disciplined control of operating costs and fee income flows directly to net profits! Ashmore, specifically, has an enviably flexible cost structure, in which variable compensation is by far the biggest line (over 50% of total operating costs), thus providing some flexibility when times take a turn for the worse.
3. The fixed portion of wages for Executive Directors is capped at £100,000, while the variable part of the compensation depends on how well the investment strategies do. And even this variable part is biased towards long-dated equity awards, with compulsory minimum deferral into equity with five-year vest (plus the opportunity for employees to forgo cash in return for equity). The average length of senior employee service is 12 years and employee ownership is approximately 40%: Mark Coombs stills owns 31% of the shares (although he has been selling down as he was at 42% few years ago) and an employees’ trust owns a further 7%.
4. Despite the assertions of many academics, emerging markets are difficult to replicate via ETFs, especially fixed income. Local restrictions on operations, liquidity, the need-to-know domestic markets, ... force ETFs to invest in the most liquid and well-known securities, which are also those where there is less value. A truly active strategy in EM should still be able to generate significant alpha.
5. Ashmore does not have a culture of “star fund managers” who could leave and take clients with them. The team-based investment process (it employs approximately 100 investment professionals) mitigate the key man risks.
The main risk remains the inherent volatility of AuMs, which may not be as stable as desired, especially in a sector like EM. Ashmore would certainly do well to learn from the experience of Artio Global Investors, which is well described in this article from few years ago (Financial Times). One of its strengths, however, is the reduced percentage of investments by retail investors / intermediaries (around 12%), with the majority held by institutional investors, typically more interested in the long term and less "fickle".
…but also some minuses
Traditional active management is under attack from several sides, most important from passive funds and ETFs. And with yields at historic lows (even in EM, although this is probably changing), it is more difficult to generate the same level of commissions, as these represent a greater proportion of returns for clients.
Despite all the claims of higher inefficiencies, EM have not been immune from the relentless fee compression from cheaper products, and this is evident for Ashmore as well.
Net management fees that were around 100 bps when Ashmore listed are today just 40 bps. And performance fees almost disappeared: they used to represent around 20%-30% of total income fees, now they are more 2%-4% (less than 1bp over the last 3 years and less than 3bp over the last 5 years, on average).
This is a testament to the “maturity” of these asset classes and the difficulties of extracting alpha consistently. Just look at how quickly management fees for Ashmore’s biggest strategies converged in a decade to a much lower level (management fees are currently higher for the other strategies - 60 bps for equities and 130 bps for alternatives, but they are also feeling the same pressure).
That said, one of the most important factors for any active manager is the historical track record: for many consultants and asset allocators, relative performance is (unfortunately) the only variable to consider. And from this point of view, Ashmore’s performance is mixed but not very satisfactory: in aggregate, only 54% of its funds outperformed their benchmarks over 5 years, with the strongest relative longer-term performance in local currency, equities and corporate debt.
Is there really a moat in asset management?
The most important thing in any investment is not what the company has done to date, but what it can do from now on.
In theory, setting up a new asset management firm is relatively simple, and we often see the launch of new billion-dollar funds by some well-known manager who has exited another company. However, in the case of EM the situation is more complicated: it’s not too complicated to invest in EM bonds denominated in USD or EUR, but gaining access to local markets is much more difficult. Ashmore’s experience and knowledge in this area are not easily replicable: for example, in 2014 it was the first non-Hong Kong company to obtain the license to invest directly in the Chinese onshore market. (Funds Europe)
Other “moats” are mainly cost and distribution advantages from scale and relationships with capital allocators and government officials that have been built up since Mark Coombs first got started in the 1980s. These advantages are real: anyone who has tried to start a small fund management company has experienced first-hand the barriers to entry in this business and the struggle to reach the critical masses.
Conclusions
Ashmore is a company I’ve been looking at on and off for few years now, but never convinced myself to pull the trigger to buy.
The very short thesis is that it’s a simple way (although “intermediated”) to invest in emerging markets, without having specific exposure to any country and/or sector, but rather having someone with enormous experience to do it for you.
In true contrarian style, a bull would probably say that the short term may look difficult, but time really is the friend of a wonderful business. Despite current fears, EM capital markets are set to grow in the long run and by specialising in these investments, Ashmore has built a higher reputation and credibility than a traditional manager with a few dedicated EM funds among all those offered. It has a decent performance track record, the robustness to weather bad periods because of its size, low fixed costs and great management with skin in the game who should be able to capitalise on long term structural tailwinds.
Many investors are probably scared by Vanguard and BlackRock decimating profitability for all other asset managers. For Ashmore, the marked reduction in average commissions collected is in part due to the prevalence of institutional mandates, in particular segregated portfolios that command lower fees as institutional investors are more sensitive to costs. For these reasons, at the latest Investors’ Day, Ashmore has highlighted two medium-term strategic initiatives:
A push for intermediary retail: it is true that these investors are typically more cyclical and leave at the worst possible time (when things go bad), but they also generate higher net revenue margins, which are desperately needed right now. Ashmore is bulging up dedicated distribution teams in US and Europe, where it already has a comprehensive product range available on scalable mutual fund platforms
Equities: both the global and local EM investment teams already share the same research framework across asset classes and locations; and not only fees are higher than in credit, but Ashmore should be capable to scale all its strategies as it is starting from a much lower asset base. But for equities, the past track record is paramount to win clients, even more than relationships.
To be honest, the jury will be out for a while on these two initiatives.
Another point often put forward is the flurry of deals in asset management. Investors have been withdrawing their money from active funds and switching into lower fee passive and quantitative products for years, a trend widely expected to continue. At the same time, technology and operational costs are rising, and the regulatory burden has also increased. The only way for firms to compete seems to be to gain scale and lower the cost to manage each dollar.
To gauge how consolidation might play out and who could hypothetically participate, Morgan Stanley last year produced this slide highlighting companies with in-demand niche product and/or distribution capabilities which could be ideal targets, singling out specifically Ashmore (in addition to Brightsphere, Virtus, WisdomTree and Man Group).
There have several transactions in the asset management space over the last few years, among them:
In 2020 Franklin Templeton bought Legg Mason for US$6.5bn (US$4.5bn in equity plus the assumption of US$2bn of Legg Mason’s existing debt): with the target having assets of US$806 billion at the time, the price was thus a mere 0.8% of AuM
In 2021 Morgan Staley acquired Eaton Vance for US$7bn, adding US$500bn to its assets for a price of 1.4% of AuM
In Europe, in 2020 Jupiter Fund Management bought Merian Global Investors for £370 million, equivalent to 1.6% of AuM (but 25% less than private equity buyers shelled out for the company in 2017)
Still in 2020, Amundi bought the asset management business of Spanish bank Sabadell: €430 million for €22bn in assets, ~2% of AuM
All these asset managers were more retail oriented (and thus facing more pressure from passive products); Ashmore is more dedicated, so for a strategic buyer a higher multiple could be warranted, but the ~2% current AuM/EV metric does not significantly undervalue the company. Its current mkt cap (US$2bn) should not be a problem for global players, but it’s also worth considering that Ashmore's strength is its “entrepreneurship”: not sure Mark Coombs and the other top managers would prefer to swap their controlling stake in a specialised asset manager to end up being just one of many departments within a larger company with products to sell and budgets to meet. They would probably prefer to cash out and monetise what they built over 25 years: I don’t rule it out, but it is difficult to see someone to pay a premium with the risk of seeing the best managers (the most valuable assets) immediately leave.
Finally, I highly recommend reading this article (Financial Times): while it’s undoubtedly heavily influenced by the current state of affairs, some of the points raised really make you think about the attractiveness of EM debt:
Over the past two decades, the industry that peddles emerging market sovereign debt — countries, their bank underwriters, and the lawyers that write the contracts — has been peddling bonds that are unsafe at any price.
[…] As is their observation that no one is quite sure how much debt is out there, particularly since China began flooding the developing world with massive Belt and Road loans. Sovereign debt defaults are a perennial issue, and the risk of a coming crash is real.
[…] Clause by clause, covenant by covenant, sovereign debt instruments have been intentionally and systematically stripped of nearly every provision that might safeguard the interests of creditors. Indentures often run to hundreds of pages. Dense legalese suggests that sovereign bonds contain robust, actionable legal rights. But that’s nothing more than magical misdirection: a delusion.
I’m not a macro investor and my predictions can be very wrong: although the long-term outlook for EM is likely positive, given the current headwinds (persistently high inflation, rising interest rates, tightening liquidity, geopolitical tensions and global food insecurity), the last place I want to be in is EM, especially credit.
People often see a P/E of 10x-15x and say: “See, it’s not expensive and it’s cheaper than its historical average!” That can be true, but only if earnings can’t halve; if they can, it could be very expensive.