Given the 13% fall in Coronation’s headline earnings and the fact that 30% of the profits make up the bonus pool for the business, some fund managers might not scrape together quite enough for another Lamborghini.
They might have to slum it in a Porsche.
At one stage, it looked as though Coronation Fund Managers would be getting 35% of flows into the unit trust industry in perpetuity.
But these flows are cyclical and Coronation, the only listed self-contained large asset manager in SA, had to concede that it experienced outflows of R18bn during the year to September.
During the September quarter it had outflows of R1.27bn, excluding the low-margin money market fund.
At the same time, Allan Gray, Prudential, Investec, Absa and Nedgroup each had net inflows of more than R4bn.
Coronation does, however, remain a strong cash generator for staff and shareholders.
In fact, CE Anton Pillay says that 100% of the free cash flow was distributed to shareholders in dividends.
Apart from pay, rent and a few computers, Coronation has little need for capital.
Pillay says Coronation manages money for more than 80% of SA’s retirement funds and though R61bn was withdrawn from institutional clients it still runs a sizeable R378bn.
And it still has two of the largest unit trusts in SA, Coronation Balanced Plus (R84bn) and Coronation Balanced Defensive (R39bn).
However, competition is increasing as a range of midsize managers such as PSG, Truffle, Ashburton and Visio expand their footprint.
But Pillay says that pain is reduced under the Coronation model as there is a high variable cost — including the bulk of remuneration as fixed salaries are relatively low.
Variable costs accounted for 70% of the total, and as they were down 10% total operating expenses fell by 3%.
Karl Leinberger and Neville Chester have been the most senior portfolio managers at Coronation for more than eight years and neither is close to drawing a pension. They have built up an impressive record with all the flagship funds in the top quartile.
Some rebalancing away from Coronation by multimanagers and advisers is to be expected, but it remains a strong contender.
In its peer group, Investec is probably the most admired as a business, though nobody has insight into privately owned Allan Gray’s numbers. Most of the focus at Investec is on its specialist banking, which is still responsible for about 60% of group profit. But the quality of that unit is indifferent. Its operating profit fell by 7.2% to £180m. The only silver lining was that the losses from the legacy book — bad loans written before the global financial crisis — fell by 7% to £33m.
Increasingly, the quality businesses in Investec are seen to be Asset Management and Wealth & Investment. The latter is in effect also an asset manager, focused on the private client market. The two divisions account for almost 40% of group operating profit, and group CE Stephen Koseff wants this to keep growing as these businesses need very little capital to operate. Asset Management’s operating profit was up 17%, Wealth’s up 14%.
Investec remains in the select group, with Foord, Coronation and Allan Gray, that dominates the SA pension fund market, particularly in balanced funds.
It differs from the co-ordinated monostyle approach of Coronation, with completely different investment styles adopted by Clyde Rossouw’s "quality" team, Chris Freund’s earnings momentum team, John Biccard’s value team and the eclectic Gail Daniel’s funds.
CE Hendrik du Toit has built a business with a global client base, more so than any other SA-based asset manager. Even Old Mutual at the peak of its global empire building did not have such a seamless offering. More than half of Asset Management’s profits are derived from outside SA. There were net flows of £1.2bn in the six months to September.
In the September quarter there were net flows of R8.5bn into the Investec unit trust suite, and it is not dependent on one or two funds. Its biggest — Investec Opportunity, at R43.5bn — is still about half the size of Coronation Balanced Plus.
A different approach to investment in asset management would be to look at Peregrine.
It does not depend on traditional asset management lines such as unit trusts and segregated institutional portfolios. It is well placed to benefit from the increased demand for hedge funds, at several levels, from its direct hedge fund businesses, Peregrine Capital and Green Oak; from the prime broking executed through Peregrine; and from its collective investment scheme management company, H4. Peregrine CE Jonathan Hertz says he will also be setting up joint ventures with established long-only fund managers, providing them with seed capital to set up hedge fund businesses. The first of these has been signed with the niche manager Electus.
The Peregrine group has a reputation for being dependent on variable income, but Hertz says that in the six months to September, the portion of earnings from annuity income increased from 60% to 66%. And in spite of the effects of Brexit on the sterling income of its Stenham subsidiary, the portion of foreign income was almost unchanged at 34%.
Hertz’s purchase of half of advisory firm Java Capital in June 2014 proved worthwhile as it was the fastest-growing part of the group, with headline earnings up 48%. It is dominant in giving advice to property listings on the JSE.
Peregrine’s largest business, the wealth manager Citadel, was the poor performer, with headline earnings barely moving up.
Its performance fees fell by two-thirds to R3.6m.
It nonetheless has a strong franchise, enhanced by the acquisition of Consolidated Financial Planning at the beginning of the year. This plays in a less affluent niche, where clients usually have net assets below R5m.
Citadel boasts a 97% retention rate for clients over the past three years and it has R45bn under management.
It has a more conservative culture to counterbalance the racier "seat of the pants" approach of its hedge fund siblings.