The Business Of

Ninety One | How Do They Make Money?

Morning All!

So yesterday we saw what asset managers like Ninety One actually do. And today, let’s dive into how these companies make money!

A Very Small % Of A Very Big Number = A Big Number!

So we know asset managers help pension funds and other clients by investing their money into various asset classes and growing their money. But do they do this out of the kindness of their hearts…?

Behave!

Asset managers like Ninety One charge their clients an annual fee for managing their money. This is known as the annual management charge (AMC). Ninety One, like every asset manager, has several mutual funds. For example, the company has a Global Equity Fund, which invests in equities from all over the world. It has a European Equity Fund, which invests in equities from Europe. It has a Latin America Corporate Debt Fund, which invests in bonds from Latin America. And so on.

Across all their mutual funds, the average AMC for Ninety One is 0.46% (46 basis points). Whilst this looks like a tiny amount, 0.46% of £144bn (Ninety One’s AUM) = £540m (Ninety One’s management fee)… a big number! This fee changes very little over the years and so as an asset manager increases their AUM, management fees increase in a very correlated way. This is seen below for Ninety One where the shape of both curves is near identical.

But 0.46% Is Tiny… Surely They Can Increase It Just A Little?

Okay, let’s say you’re the CEO of Ninety One and you decide to charge your future clients a higher fee for managing their money. You aim to raise your average AMC from 0.46% to 0.9%. Now, along comes a large pension fund, looking for an asset manager to manage its £1bn fund. Ninety One offers its services for a 0.9% fee, however, your competitor, Schroders is offering to manage the pension fund’s money for just 0.3%. Who do you think the pension fund is likely to choose…? The pension fund would have a huge incentive to go with your competitor, the cheaper option. Because they would save £6m (0.6% of £1bn)!

Most likely, you’ve just lost a potential client…!

It’s important to note that in industries where (i) the product is more of a commodity, or (ii) the benefit is uncertain, pricing is a key differentiator. When a pension fund chooses an asset manager, the differences between the competitors are small and the future benefit they’ll receive is also uncertain. However, the tangible, present benefit they can receive is by choosing the fund with the lower fee.

If we look at the graphic below, we’ll see small differences in the average AMC for 4 publicly listed asset managers in the UK. However, these differences are mainly to do with the type of clients each asset manager has. Large, institutional clients (pension funds, sovereign wealth funds) who are investing billions will be charged a lower AMC than retail investors (me and you). And hence, an asset manager like Schroders that has more institutional clients often has a lower average AMC.

But why do asset managers charge institutional clients a lower AMC? Well, it’s a similar reason to the Deliveroo-McDonald’s example we looked at 2 weeks ago. All the food delivery apps want McDonald’s on their app. They know McDonald’s will bring in lots of orders and hence revenue. With Deliveroo, Uber Eats, Just Eat, etc all queuing up for their business, this gives McDonald’s strong bargaining power. And hence they negotiate a nice discount.

Similarly, when a large pension fund is deciding who should manage their assets, all the asset managers are vying for their business. They know that the substantial increase in AUM will bring in a substantial increase in revenue. With Ninety One, Schroders, BlackRock, etc all queuing up for their business, this gives the pension fund strong bargaining power. And hence they can negotiate a nice discount! Food delivery and asset management - different businesses, but similar dynamics here!

That’s a wrap for today! We’re back tomorrow with the third part of Ninety One where we’ll be looking at how costly it is for asset managers to operate their business model.

And for readers interested in the asset management industry, the Career Talk video this Friday will be a good one for you! As this week you’ll be hearing from me! (https://www.linkedin.com/in/nigel-jacob-cfa-4b3b17a7/).

After graduating from the University of Bristol in 2015, I worked at Ninety One (in asset management) and then Jefferies (in equity research) before starting the MBA at London Business School. On Friday, I’ll be talking about…

• how I got into asset management and equity research,

• what my teams actually did,

• the differences between asset management and equity research, and,

• advice I’d give to students who are interested in either industry.

If you have any questions you’d want to ask me, then please feel free to ‘Reply’ to this email and I’ll be sure to answer. Looking forward to it… have a great day!

The Business Of Team

14th Mar 2023

Nigel Jacob CFA