Be­ing a big ’un can bite you

Size does count in the as­set man­age­ment in­dus­try — but not al­ways in your favour. Wit­ness the re­ac­tion to a trad­ing up­date from Coro­na­tion Fund Man­agers af­ter it warned of lower profit for its 2015 fi­nan­cial year as the strong per­for­mance fees of the prio

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MOST fund man­agers don’t out­per­form the mar­ket. The few that do are re­warded with the per­for­mance fees they charge over and above their stan­dard man­age­ment fees. So, when the mar­ket is caught off guard — as it was with last year’s dra­matic fall in com­mod­ity prices and the ac­com­pa­ny­ing slump in the value of listed re­sources stocks — those man­agers not quick enough to get out are un­likely to main­tain their mar­ket out­per­for­mance and per­for­mance fees suf­fer.

That was the case with some of the larger man­agers that weren’t able to exit po­si­tions as quickly as their smaller peers. Coro­na­tion is a case in point. It’s not as ag­ile as smaller man­agers and can­not switch po­si­tions as easily or take ad­van­tage of op­por­tu­ni­ties.

It’s all about al­pha for ac­tive man­agers and the larger you are, the more dif­fi­cult it be­comes to de­liver re­turns that beat your bench­mark as you ef­fec­tively be­come the mar­ket, says Bjorn Zi­ets­man, an eq­ui­ties an­a­lyst at Av­ior Cap­i­tal Mar­kets.

“I think it is eas­ier for smaller fund man­agers to find al­pha as they don’t be­come the mar­ket, as Coro­na­tion does,” he says. “Coro­na­tion has to take a big po­si­tion to move the nee­dle so it be­comes more dif­fi­cult to gen­er­ate al­pha.”

Based on SA as­sets, Coro­na­tion is the coun­try’s largest fund man­ager. Though Investec As­set Man­age­ment beats it with more than R1 tril­lion in funds un­der man­age­ment, these in­clude funds man­aged un­der in­ter­na­tional man­dates for off­shore clients. As it takes on more as­sets it’s be­com­ing tougher for Coro­na­tion to lead the rank­ings for eq­uity and bal­anced-fund per­for­mance, as it has done for an ex­tended pe­riod.

“Coro­na­tion did well for a very long time, but al­ways main­tained that in­vestors couldn’t ex­pect these re­turns into the fu­ture,” says Trevino Ram­samy, head of in­vest­ment sur­veys at Alexan­der Forbes.

Per­for­mance fees have fallen be­cause of per­for­mance, but that’s a fac­tor of the mar­kets, he says.

“In the global bal­anced funds, it’s still one of the best per­form­ers,” he says. “Ob­vi­ously it has taken some pain in the short term. In­vest­ment strate­gies can­not re­main dom­i­nant in all mar­ket cy­cles.”

So while Coro­na­tion’s strong per­for­mance over the past few years has made it the largest man­ager of SA as­sets as it at­tracted new man­dates and more cus­tomers, it’s also be­come a vic­tim of its own suc­cess and has stopped tak­ing new clients in its SA eq­uity and multi-as­set funds. Man­ag­ing growth by clos­ing off some funds to new in­sti­tu­tional in­vestors ef­fec­tively puts a cap on the amount of funds they man­age in any given port­fo­lio. This helps them to bet­ter man­age their per­for­mance, says Zi­ets­man.

“They want to pro­vide the same level of man­age­ment and in­tegrity to ex­ist­ing clients, but it’s dif­fi­cult to take on more clients based on the size of their busi­ness at the mo­ment,” says Ram­samy. “As a house, it’s also a

It is eas­ier for smaller fund man­agers to find al­pha as they don’t be­come the mar­ket

Ram­samy cau­tions that past per­for­mance is no guar­an­tee of fu­ture per­for­mance

lot more dif­fi­cult to take mean­ing­ful po­si­tions in their port­fo­lios be­cause that may in­ad­ver­tently trig­ger an of­fer to buy out other share­hold­ers if they breach 35% of the to­tal own­er­ship.”

Apart from Coro­na­tion’s cor­re­la­tion to mar­ket lev­els, which ul­ti­mately af­fects as­sets un­der man­age­ment, it was al­ready ex­pen­sive rel­a­tive to its global peers on a price-earn­ings rel­a­tive ba­sis and when com­par­ing price to as­sets un­der man­age­ment, Zi­ets­man says.

“I be­lieve the rea­son why they were so highly rated could be at­trib­uted to their growth po­ten­tial and abil­ity to at­tract re­tail flows,” he says. “Their abil­ity to at­tract re­tail flows re­mains high rel­a­tive to com­peti­tors, but the quan­tum of flows in the in­dus­try has slowed, and I be­lieve that has to do with a more con­ser­va­tive in­vestor mind­set as a re­sult of ex­pen­sive cap­i­tal mar­kets.”

Zi­ets­man says Coro­na­tion’s per­for­mance fees aren’t linked to mar­ket per­for­mance, but to how it out­per­forms its spe­cific bench­marks.

“In a pe­riod when the mar­ket is per­form­ing well, it has to out­per­form the mar­ket by tak­ing views and be­ing over­weight or un­der­weight in spe­cific stocks and sec­tors,” he says. “Prior to Coro­na­tion’s trad­ing state­ment, I don’t think any of the an­a­lysts saw earn­ings go­ing back­wards and I think that sur­prised the mar­ket.”

While out­per­form­ing bench­marks in weak mar­ket con­di­tions should also boost per­for­mance fees, Zi­ets­man says a ris­ing mar­ket should ben­e­fit them more as this boosts as­sets un­der man­age­ment.

An­a­lysts may have un­der­es­ti­mated the con­tri­bu­tion of per­for­mance fees to Coro­na­tion’s rev­enue, he says.

“We es­ti­mate that per­for­mance fees made up be­tween 25% and 30% of the rev­enue in full-year 2014 and that is now be­tween 10% and 13%,” says Zi­ets­man. “Per­for­mance fees as a per­cent­age of the rev­enue mix have come down sig­nif­i­cantly.”

Coro­na­tion was over­weight in sec­tors such as re­sources, he says. While this re­mains risky, it could also present an op­por­tu­nity as they present value at the mo­ment and could boost per­for­mance fees if they come off their low base.

Its ex­po­sure to African Bank also hurt as it tried to re­duce its hold­ings ahead of the mi­crolen­der’s col­lapse last year. Coro­na­tion wasn’t alone — Investec As­set Man­age­ment’s SA busi­ness was also ex­posed in its money mar­ket funds. It, too, strug­gled to main­tain its per­for­mance in the sec­ond half of its 2015 fi­nan­cial year.

“Investec As­set Man­age­ment has been per­form­ing well from a global per­spec­tive but the SA busi­ness has strug­gled re­cently,” says Av­ior Cap­i­tal Mar­ket’s Harry Botha. “They have seen net out­flows due to weak per­for­mance, mostly the Value Fund, man­date ro­ta­tion — in­sti­tu­tional clients mov­ing away from bal­anced man­dates which af­fected the Op­por­tu­nity Fund — and ex­po­sure to Abil in their money mar­ket funds.”

Botha says the SA busi­ness’s op­er­at­ing profit be­fore mi­nori­ties was up 20% year on year in rand terms in the six months to Septem­ber 2014, but up only 7% year on year for the year to March. The UK as­set man­age­ment’s op­er­at­ing profit be­fore mi­nori­ties was up 13% in the first half and 12% for the full year in ster­ling.

How­ever, Investec has re­fo­cused its SA team and hopes to slowly start im­prov­ing its per­for­mance rel­a­tive to its bench­marks in or­der to earn higher per­for­mance fees and at­tract more funds, he says.

While large man­agers such as Investec and Coro­na­tion bat­tle to move the nee­dle, Zi­ets­man says smaller man­agers such as PSG Kon­sult can take a rel­a­tively large po­si­tion in an illiq­uid share to help gen­er­ate re­turns above the mar­ket.

“PSG Kon­sult has gen­er­ated pos­i­tive one-year, three-year and five-year al­pha in its per­for­mance-fee earn­ing fund,” he says. “You are see­ing smaller man­agers com­ing up the ranks.”

Other man­agers that are start­ing to gain trac­tion in­clude Vi­sio Cap­i­tal, Mazi Cap­i­tal, First Av­enue In­vest­ment Man­age­ment and 36One As­set Man­age­ment.

“These small and up­com­ing man­agers no longer sit with the R1bn to R2bn they man­aged a few years ago,” says Ram­samy. “Now they are man­ag­ing in ex­cess of R10bn and much more in some cases.”

One man­ager at­tract­ing sig­nif­i­cant flows is Fo­ord, he says. Though it was smaller, it had sig­nif­i­cant out­per­for­mance, which has al­lowed it to more than dou­ble in size over the past two to three years.

“For a long time, it man­aged less than R50bn, but as per our 2014 sur­vey it has more than R130bn un­der man­age­ment. With bet­ter than av­er­age per­for­mance since this sur­vey, it’s likely that they have grown fur­ther. ”

But while some of the smaller man­agers have fared well, some have lost as­sets due to man­age­ment style and poor per­for­mance, par­tic­u­larly those with a value bias.

“We don’t think they are bad man­agers, but they haven’t been re­warded due to their in­vest­ment style,” Ram­samy says. “Value should be seen as a strat­egy that de­vel­ops over mid- to long-term cy­cles, but some in­vestors aren’t pre­pared to wait that long and can’t keep on tak­ing the pain.”

De­spite some of the smaller man­agers mov­ing up the ranks, Zi­ets­man doesn’t be­lieve that Coro­na­tion is los­ing busi­ness to bou­tique man­agers. Flows re­main pos­i­tive and the in­dus­try as a whole has been af­fected by mar­ket un­cer­tainty.

“There is a lot of brand value in Coro­na­tion, which is help­ing them to con­tinue to at­tract re­tail flows,” he says.

And while man­agers like Fo­ord rise up the rank­ings, Ram­samy cau­tions that past per­for­mance is no guar­an­tee of fu­ture per­for­mance — as has been il­lus­trated by Coro­na­tion.

“We don’t judge the qual­ity of an as­set man­ager on its short-term per­for­mance; we look at its phi­los­o­phy, style, process and peo­ple,” says Ram­samy. “For a long time Coro­na­tion con­sis­tently out­per­formed. It’s one of those man­agers with a very ex­pe­ri­enced team.”



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