|Shares Out. (in M):||673||P/E||16.7||15.3|
|Market Cap (in $M):||3,083||P/FCF||16.7||15.3|
|Net Debt (in $M):||0||EBIT||173||194|
Ashmore Group PLC is a UK-based investment management firm focused on the emerging markets. The firm currently manages $76.5 billion comprised of fixed income, equity and currency strategies, with close to 90% of AUMs tied to fixed income. The company’s strategy offerings are well diversified across countries and client type.
The company was founded in 1999 via a management buyout from New Zealand Bank by current CEO Mark Coombs, who owns ~40% and sits on the trading desk. Ashmore IPO’d in 2006. Overall, insiders own 47% of the company.
We believe Ashmore Group is a timely investment for the following reasons:
Attractive valuation and strong balance sheet;
Less exposed to indexation;
Secular growth potential in emerging markets
ATTRACTIVE VALUATION WITH STRONG BALANCE SHEET
Ashmore maintains a strong balance sheet, with over £650 million in cash and no debt. A portion of the company’s excess cash and free cash flow is directed to seed new investment strategies. However, even after this cash use, excess cash is approximately £485 million, or 0.72 pence per share (20% of stock price). As emerging markets bounce around (as is their nature), the company has paid a consistently stable dividend in the £0.13–£0.17 per share range since 2010, suggesting a dividend yield of around 4.5%.
Ashmore sells for 15x FY 6/19 EPS, or ~11x P/E net of its excess cash position. In our view, this is an extremely attractive entry point for a leader in a segment of the investment management landscape that is less vulnerable to indexing and also has elements of a long-term compounding business model.
LESS EXPOSED TO INDEXATION
As we look across the spectrum of asset management firms, it seems if you are not one of the big three passive managers (Vanguard, Blackrock, State Street), it is hard not to see the risk of continued indexation of the investment world as investor flows continually move towards passive/ETF investing. Ashmore would seem to have significantly lower indexation disruption risk than many publicly traded investment management peers.
Emerging markets are far less indexed than developed markets. Within emerging markets, it is estimated that only 8% of fixed income and 18% of equity market caps available are actually represented in benchmark indices. Active management remains the primary method of exposure to this asset class.
As shown in the table below, Ashmore manages money in eight different investment “themes” although 90% is fixed income related. They have a very strong history of investment performance with 86% of AUM outperforming benchmarks over 3, 5 and 10 year period.
Around 80% of AUMs comes from public and private pension funds and government sources.
SECULAR GROWTH POTENTIAL
Emerging markets, as an asset class, seem well positioned to continue generating above average growth rates over the intermediate to long-term given secular macro tailwinds. Emerging markets represent 85% of the world’s population, 60% of global GDP, and 32% of global consumption. Yet emerging markets share of global financial and debt markets is only 20%. Meanwhile emerging market debt to GDP is only 165%, or about half that of developed markets (305%).
Emerging markets allocations from institutional investors remain low at approximately 4% to EM fixed income and 7% to EM equities. Investor allocations to emerging markets grew strongly from 2009-2013, were negative in 2014 and 2015, and have started to trend up again since 2016. Volatility comes with the territory in emerging market-land, as evidenced by Ashmore’s funds flow chart below. Thus, a strong balance sheet is necessary to ride out these inevitable ebbs and flows.
We view Ashmore’s entrenched position in emerging markets leaves them well positioned to capitalize on many of the ratios below converging in the next few decades (yes, we said decades).
PERFORMANCE TRACK RECORD:
Ashmore has an impressive performance track record. Over 1, 3, and 5 year period’s 86% of their AUM has outperformed their benchmark. Without getting into the details of each sub category, the bottom line is Ashmore has a 25 year track record of successful investment performance which is one of their moat like attributes making them the leader in this market. They have a well-defined and proven investment methodology and the numbers to back up their leadership in the space.
Fees are obviously under downward pressure as is common throughout the industry (see below). Management fees as a % of AUMs have declined from the mid-60 basis points range to around 40 basis points currently. While fee rates may continue to decline over time, the materiality should be lower than in years past simply due to the math and the convergence with passive fee rates. Regardless, an investment in Ashmore is a nod to the belief that the current fee run-rate of 40bps for an actively managed emerging market fund with a successful performance track record is defendable over time; at least fee rates in that general zip code.
Ashmore is a market leading pure play investment manager specializing in emerging markets strategies. The majority of their strategies have outperformed their benchmark on a historical basis and they maintain low risk of competition from ETFs due to the lack of and difficulty indexing in these markets. Ashmore is well-diversified does not have exposure of more than 5% to any one country. They are consistently profitable and cash flow generative and maintain a pristine balance sheet.
Ashmore should continue to grow their AUMs through cyclical asset flows (managers are still underweight EM), and expansion of EM debt markets
Emerging markets represent:
85% of the world’s population
60% of global GDP
32% of global consumption (And rising)
Yet, emerging market share of global debt and financial markets is only 20%.
Long-term secular trends should lead to AUM balance growth. AUM balance growth will support operating leverage that improves net income margins and grows profit.
Ashmore is in a prime place to capitalize on this trend. They are an excellent operator in their market, have very stable financial metrics, and a well-motivated management team with employees owning 47% of the equity. They are reasonably valued with a moderate margin of safety and a good investment for someone with a long-term investment horizon who can stomach the ups and downs of emerging market financial assets. Risk would include continued long-term trends of management fee compression and general reliance on the emerging market capital markets asset class.
Ashmore Group PLC, a leading independent investment management firm focused on emerging markets, has declined of late due to weakness stemming from tariff concerns, Italy woes and the usual psychological turbulence that comes with emerging markets investing (resulting in industry outflows). Meanwhile, emerging markets have been far less penetrated by indexing due to their less liquid, more eclectic nature, and 86% of Ashmore's AUMs have outperformed their benchmarks over the intermediate term, resulting in steady inflows over the past few quarters. We believe a continuation of these inflows, coupled with the eventual stabilization in emerging market nervousness, will result in a meaningfully higher valuation for Ashmore shares longer-term.
|Entry||07/13/2018 10:39 PM|
Banjo, you make a fair observation, and I struggled with EV/AUM as an appropriate metric for Ashmore given its superior profitability metrics. Most investment management firms generate operating margins in the 20-40% range as they have to pay for distribution and marketing. Ashmore does not have the bulk of these costs (which I should have highlighted in the write up) and thus generates 60-65% margins, or 2-3x those of most peers. Is it appropriate to use EV/AUM if Ashmore’s business model is so much more profitable than peers?