ASHM - Ashmore Group PLC

[klarmanite]

Bestinver AM (Francisco Parames) bought 8m shares (new position) in Q1: http://www.gurufocus.com/news/257337/spanish-investor-francisco-parames-five-new-firstquarter-stocks

 

[klarmanite]

Ashmore reported strong AUM numbers today. And its the most shorted UK large cap. Go figure.

 

Still reasonably priced (my ests):

 

 

[topofeaturellc]

Its really a pretty attractive short from a portfolio perspective if you have a bunch of EM exposure elsewhere.  EM credit spreads are at all time lows, RFR are at all time lows.  Even if you think people are underallocated to EM it might make sense if you want to limit your exposure to "EM Risk".

 

As a standalone its much more of a bet on EM blowing up in a reasonable time frame and being short a business with a tremendous amount of operating leverage and a top line tied to credit and rates.  The other thing is that the sort of institutions these guys have as investors as massive herders.  They might not fire them (right away) if EM credit blows up, but they'll stop allocating - and just natural asset returns will bring the AUM number down. And decremental margins for an institutional manager are like 70%-80%

 

The longer-term bear case of course has always been fees for what is fundamentally a FI biz. But I'm guessing that's not why people are short it right now.

 

Of course none of this is new and people have been saying this for years.  But I guess the takeaway is that - yes these guys are good at what they do, but they've had a massive tailwind for the last decade+ - sure with some bumps along the way.  But look at the prices of the some of the EM deals getting done right now. It is sort of amazing.  That doesn't bode well for future performance in the asset classes that drive the business for Ashmore.

 

If you want to see what the Bear case looks like I'm reminded of what happened to Pzena Investment Management. Revenues went from 147 mil pre GFC to 63 mil at the bottom.  And yet everything you would say about Ashmore and its management you would have said about Pzena in 2006 maybe even more so - and I think today you would probably say they were true - I think he's basically recovered performance wise from his mistakes in '07-'08. . And of course if you bought PZN shares in the spring of '09 you are sitting on a 5x or 6x return - despite that fact that some of the bigger products are structurally threatened in a way Ashmore's products are not (yet?).

 

The flip side tho is that it isn't exactly unheard of for a big style/geography driven manager to unravel at the bottom of the cycle.  You can almost make a list of big value guys who killed themselves at the bottom of every value cycle. 

 

 

[topofeaturellc]

Its also interesting that their biggest fund is long lower-quality than the benchmark by a pretty big jump.  I'm very much not a quality-centric value guy at all, but it seems to me that when valuations are compressed and high, being short quality is maybe a good way to underperform.  I have sort of learned that the hard way unfortunately. 

 

that may not be representative of their biggest pool of institutional money of course.

 

 

https://www.ashmoregroup.com/sites/default/files/fund-docs/AEMDF%20USD%20I%20Net%200514.pdf

[klarmanite]

I think it's an attractive long because it's reasonably priced, well run and has secular tailwinds. EM allocations will probably grow, and as EM financial markets develop, ASHM will probably benefit.

 

As you say: "Of course none of this is new and people have been saying this for years.  But I guess the takeaway is that - yes these guys are good at what they do, but they've had a massive tailwind for the last decade+ - sure with some bumps along the way. "

 

I think that's exactly what the future looks like over the long term too though, and maybe that's whre we differ. In the short term, who knows. But it seems unlikely to me that they'll "blow up".

[Phaceliacapital]

I am new to this case, but could they get in trouble if a lot of outflows happen? In other words, how sticky are their AUM?

 

 

[topofeaturellc]

Well new allocations go to zero basically and existing assets are lumpier and less sticky than retail. Usually less sticky than management thinks as well.

 

Generally the faster institutions run into something the faster they run out.

 

Its like a 90% incremental margin business, so they will see profits decline dramatically.

 

 

[topofeaturellc]

I think it's an attractive long because it's reasonably priced, well run and has secular tailwinds. EM allocations will probably grow, and as EM financial markets develop, ASHM will probably benefit.

 

As you say: "Of course none of this is new and people have been saying this for years.  But I guess the takeaway is that - yes these guys are good at what they do, but they've had a massive tailwind for the last decade+ - sure with some bumps along the way. "

 

I think that's exactly what the future looks like over the long term too though, and maybe that's whre we differ. In the short term, who knows. But it seems unlikely to me that they'll "blow up".

 

This isn't a bet on Ashmore though, its a bet on EM. 

 

Hot asset managers blow up at a surprisingly high rate. Its really really hard to underwrite that.  You can look at what Ashmore does and see what the story is.  The odds are real and there. It might not happen, but the downside if it does is huge.  There's no margin of safety in this stock.

[klarmanite]

Not for me. For me it's both a bet on an organization and EM inflows over time. As for the "less sticky" part, 2013 and '14 would suggest otherwise if you compare ASHMs outflows with retail outflows. While I might not agree with you I appreciate you taking the time to comment on the thread (usually my threads generate zero interest).

[klarmanite]

...and whatever the fundamental truth may turn out to be, the stock is getting absolutely thrashed today. Down almost 5% so far. Bye bye, most profitable trade of 2014  :o

 

[topofeaturellc]

I suspect we have some mutual interests.  I actually get and appreciate the long-term thesis. I just think you'll get a chance to buy it cheaper. (I personally have an aversion to asset managers because I tend to think the assets of the business walk out the door everyday and eventually they all become marketing bizzes not investment bizzes, but that's not really germane here)

 

re:retail vs institutions.  institutions are like massive lumbering ships. They take longer than you think to decide they like or dislike an asset class, and then when they change course they are slower than you would expect to acknowledge their mistake.

[klarmanite]

Point taken. I actually like asset managers. I have worked in the business for a few years in a start-up before my current job, and feel I understand what differentiates the players. But the business model is both insanely profitable and quite vulnerable. So only managers with critical mass and the dicipline to not chase the most fleeting AUM are investable.  One must have a sustainable edge vs peers, either because of ability/track record, personal network and relationships built over time, or both (like ASHM).Management MUST be stellar at asset managers for the business to thrive over the long term. I think Coombs is brilliant and that on closer inspection, ASHMs AUM is relatively sticky, relatively being the operative word. 

 

I suspect however that you might indeed get the chance to buy ASHM cheaper than this. I have an effective purchase price of 3.11, with which I'm happy. But I would not be at all surprised to see the price dip considerably below that level over the next 12 months (I am one of those last remaining market bears, about as endangered as pandas currently). But my return requirements will probably be met at a purchase price of 3 and change over the next few years, so I chose to invest anyway. I also have an above average ability to withstand volatility since the capital at our firm is close to permanent. That is a luxury that many players don't have and is likely to create substantial opportunities in the next year or so...(he said, hopefully).

 

 

[klarmanite]

Argentine default fails to halt emerging market bond rally .- Financial Times

 

http://www.ft.com/intl/cms/s/0/9ccb8b8c-2c63-11e4-a0b6-00144feabdc0.html?siteedition=intl#axzz3BUHChomA

 

[Phaceliacapital]

Klarmanite, with Ashmore currently near its March low, any change in your thesis?

 

Stock prices of several of these alternative/emerging markets asset managers have not performed as one would expect they would:

 

http://snag.gy/4149V.jpg

[klarmanite]

My long term thesis remains more or less the same. But I am a little disappointed in the net AUM inflows. Also, I hae other ideas that give me a higher expected return at the moment, so I'm not long ASHM at this time. But I may very well be again in the future,