CAPE TOWN – Since around 2010 Coronation Fund Managers has been one of the JSE’s darlings. Although its share price has experienced a pull-back over the last six months, it is still over 640% higher than it was five years ago.
In the last nine months, another asset management business has also caught the imagination of investors. When Anchor Group came to the market in September 2014 it’s pre-listing issue price was R2 per share. It has since soared to over R10 per share.
There is however a third local financial services company that has flown a little under the radar. Peregrine Holdings has quietly been enjoying its own impressive run, with its share price up over 45% over the last year and nearly 150% since 2012.
The three businesses are very different in size, with Coronation boasting a market capitalisation of nearly R30 billion, while Peregrine is just under R7 billion and Anchor only around R1.5 billion. However it is interesting to compare how they are currently positioned as their prospects look quite different.
For a start, Coronation and Anchor are effectively pure traditional asset management businesses, while Peregrine is more diversified. Anchor does have interests in other areas, but its main subsidiary is Anchor Capital, a traditional asset manager that contributes around 97.5% of profits.
Peregrine has underlying businesses in both South Africa and the UK, and its interests span across asset management, specialist wealth management, trustee services, stockbroking and corporate advisory services. Its South African wealth management business Citadel is one of the biggest independent financial advice firms in the country and over the last year has grown its assets under management to R34.1 billion with a client retention rate of more than 97%.
“Wealth management business tends to be more stable than traditional asset management as assets are often sticky and you have the opportunity to leverage client relationships to generate additional fees by offering a full wealth solution,” says Chris Steward, head of financials at Investec Asset Management. “Wealth management businesses also typically command higher multiples than asset managers.”
Peregrine distinguishes itself further in that it’s asset management interests are in the alternative space, rather than mainstream long-only mandates.
“Peregrine Capital is unarguably the dominant hedge fund player in the country,” Steward says. “And given some recent changes to the regulatory environment, hedge funds have gained increased certainty and legitimacy in the eyes of investors, so there is an in-built growth momentum that will support the business for the next couple of years.”
In the current environment, a big positive of being a hedge fund manager is that your performance is less geared to that of the market, which gives you a better chance of retaining and growing assets. Over its last financial year Peregrine Capital grew assets under management from R3.7 billion to R4.8 billion on the back of strong returns.
“In a market such as we are experiencing now, which is no longer unambiguously trending positively and is showing more volatility, hedge funds can be both long of the market and short of the market, and that can give investors positive returns even when the market goes down,” Steward explains. “More traditional asset managers like Coronation are more vulnerable to market levels. Less supportive conditions have already affected their business because margins have been under pressure as the performance fees they earned historically are not coming through.”
Another feature of Coronation that makes its performance more directly tied to that of the markets is the scale it has built up. Because of its size, it will tend to be pulled more forcefully by overall conditions.
“They’ve built a great franchise over a number of years and it’s been a fantastic investment to hold,” Steward says, “but we’ve seen the spectacular flows it has enjoyed slowing and even starting to reverse in certain areas.”
Even though it is also a traditional asset manager, Anchor may be less buffeted by a weaker market because of its smaller size. It has been growing its assets under management and advice aggressively, but it is still far from Coronation’s scale.
Over the course of 2014 its assets under advice and management grew by 207% to R8.6 billion, and kept climbing to R11 billion by the end of February. Off this base, acquiring other fund businesses or attracting new assets from pension funds can also still make a substantial difference to its bottom line.
“It is a less mature business, so if they can do a few things right and win a few mandates, that can bail it out of poor markets simply because a reasonable-sized mandate could be a significant portion of its existing asset base,” explains Steward. “With Coronation, however, getting a R1 billion mandate wouldn’t really move the needle.”
As cash generative businesses, all three are dividend payers. However, Coronation, which distributes 100% of earnings to shareholders, is by far the most attractive when it comes to dividend yield.
Even though it dropped its dividend by 10% over the last financial year, it still trades on a yield of over 6%. This compares to Peregrine at around 4.75% and Anchor at close to 1.50%.
However, it’s Peregrine’s diversified offering that really makes this business look the most attractive of the three in current conditions.
“Overall it’s a business that despite having just produced stellar earnings still has a number of businesses that are dominant in their chosen niches and most importantly are well positioned for growth even in the event that markets prove to be less supportive for asset management businesses than they have been over the last few years,” says Steward. “It’s a company that I still think is quite attractive at a price around ten times earnings and nearly 5% dividend yield, with the promise of growing earnings for the year ahead. In the current market, that is something of a rarity.”