Jonathan Hertz. Picture: RUSSELL ROBERTS

Jonathan Hertz. Picture: RUSSELL ROBERTS

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ASSET management is the archetypal "capital lite" financial services business. Because it runs third-party money on an agency basis, there is little need for statutory capital. But it is also a cut-throat, winner-take-all business. There are relatively high fixed costs for the human capital and IT. Without enough assets it is tough to break even. Cadiz Asset Management, for example, fell below breakeven after it lost its R5,5bn equity mandate from the Public Investment Corp. In the six months to September, Cadiz had fixed costs of R63m and its variable costs have increased by a quarter to R10m as it introduces a staff retention scheme.

This was perhaps a little late in the day as key personnel, including fixed income manager Heather Jackson and equity manager Rob Nagel, had left in October 2012. Cadiz has R28,8bn under management, which enables it to generate revenue of R70,4m - not quite breakeven. But it is cutting its cost base. Over the six months the Cadiz staff complement fell from 115 to 100, though many of these were support staff for the old Cadiz Securities, now a subsidiary of BNP Paribas. A service level agreement with the securities business winds down by January 2014.

The good news for Cadiz is that the mix of business is improving the margin. Its average fee has increased from 0,37% to 0,44%. Cadiz CE Fraser Shaw says there has been a switch out of the money market fund into the Absolute Yield fund, a much broader fixed income fund. The retail business, written through Cadiz Collective Investments and Cadiz Life, now accounts for about 40% of total assets. This should allow Cadiz to pull through, as it would be on its knees if it relied on institutional mandates.

Coronation Fund Managers has been the best-performing share on the entire JSE this year. It shows how profitable an asset manager can be as it keeps accruing assets. Coronation has hired more staff to help it cope with growth. Over the year staff numbers grew from 220 to 246, a small increase considering that assets under management were up 45% to R492bn. With revenue of R3,6bn the business has operating expenses of R1,7bn.

But CE Anton Pillay says that just R341m of this was fixed costs. The remaining R1,34bn was variable costs - for example, what it pays to Maitland for administration, and the bonuses paid to staff, which can be cut back in lean years. Coronation's revenue grew in spite of the fact that the institutional balanced and equity books were closed to new business in December 2012. Pillay says there were institutional flows of R21bn, as R13bn came into the international portfolios which have not closed (particularly Global Emerging Markets) and the rest from existing clients who are allowed to increase their allocations. Unit trusts, though, took the bulk of the flows of R33bn, as funds such as Balanced Defensive, Balanced Plus and Strategic Income raked in cash.

Coronation has grown at the expense of other large managers, notably Investec, which reported a disappointing 7,2% growth in its SA assets to R423bn in the six months to September. Investec still dwarfs its rival, however, when it comes to international assets of £40,3bn compared with Coronation's £5bn. Coronation cannot afford to be complacent about Investec, which has a strong long-term performance with 88% of its portfolios outperforming their benchmarks over 10 years.

Coronation was the only listed fund manager before Cadiz sold control of its securities business and started the journey to become a pure-play asset manager. Peregrine had left the long-only asset management business when it sold its stake in Vunani Fund Managers (previously Peregrine Quant) last year. But it has re-entered through the purchase of a controlling stake in Cannon Asset Managers from Hollard. CE Jonathan Hertz says he is not betting the farm on Cannon as the investment has been just R15m. "It is equivalent to 0,5% of Cannon's R3bn in assets under management, a very good price.

"But we're excited for several reasons. Cannon has been the best performer among the deep-value managers. It also punches above its weight in the media through its chief investment officer, Adrian Saville." Another attraction for Peregrine is that Cannon has a material private client book of about R600m. Peregrine is already a strong player in wealth management through Citadel. But Hertz says there is a case for offering a different kind of private client offering, more focused on discretionary share portfolios. It will be a while, though, before Cannon can overshadow the big gorillas in the Peregrine group. In the six months to September Citadel made a profit contribution of R101m, double the comparable period in 2012. It now has R24,4bn under management.

Peregrine Securities, one of the three largest stockbrokers by volume, earned R43m, almost 50% more. The group's troubled UK fund of hedge funds and property business, Stenham, also helped the bottom line as earnings were up 19% to R33m.