The Business Of
Ninety One | Outlook
Morning All!
It is Friday, and we’ve covered quite a bit this week. So let’s keep it fairly light!
We’ve seen that all in all, the asset management industry has a lot going for it. Consistent revenues. High margins. Strong dividend payouts. What more could you want?! Well, for all the good stuff, there are a couple of important risk factors we do need to mention…
Let’s dive in…!
People Just Aren’t As Active These Days
And no we don’t mean like in the Michael Scott way below…
… we’re talking about active investing! For those of you keeping up to date with the markets, you’ll know that passive investing (basically ETFs) has seen a huge rise in popularity over the last decade. In fact, last year saw the first time where passive funds held more of the US stock market than active funds. The impacts of this are discussed widely by various commentators and we think this article here sums up the arguments for and against passive investing nicely.
However, what we’re here to discuss is the impact of passive investing on active asset managers like Ninety One. So how are they impacted? Well, the main issue for Ninety One and their peers is to do with AuM. As the chart below shows, the money flowing into active funds has been steadily declining over the past decade. Whilst passive funds are receiving far stronger inflows.
The reason this is incredibly important is because AuM is the lifeblood of an asset manager. Remember an asset manager’s revenue is AuM x AMC (annual management charge). So if AuM is going down because of outflows into passive funds, revenues are going to be falling! Maybe check back to Tuesday’s ‘How Do They Make Money’ newsletter for a refresher on this if you need!
Outperformance To The Rescue?
So what can asset managers like Ninety One do to prevent clients moving their money to passive funds? The answer is outperformance.
Passive funds are passive. Meaning that they only perform as well as the index they track. So if the stock market index goes up 10% in a year, a passive fund will also go up 10%. However, if the stock market index goes down 10%, the passive fund will also go down 10%. What about an active fund? If a stock market index goes down 10%, an active fund could still make money for an investor. As we talked about on Wednesday, this outperformance is known as alpha.
Funds that can demonstrate strong, consistent outperformance have a huge advantage in holding onto their assets. In the screenshot below, we can see how Schroders aim for their Global Equity Fund to outperform the MSCI World Index over a 3-5 year period.
However, talking is one thing. Actually being able to deliver outperformance has been a lot more difficult for asset managers. According to Morningstar, only 25% of active equity funds outperformed their benchmark index over a 10-year period. Only 25%!
The chart below shows how UK asset managers have fared on 3-year basis. We can see a fair amount of fluctuation for Ninety One. 82% of their funds performed better than their benchmark index in 2021, but only 55% in 2020. Schroders has been much more consistent.
However, bear in mind that for all these UK asset managers, these numbers are inflated due to survivorship bias. Funds that were shut down due to poor performance don’t even make these studies! And including these funds would drag down these outperformance numbers even further. The struggles in performance for asset management firms was highlighted in this 2021 article by the FT. Which claims that pension funds are wasting their money on outsourcing asset management to firms like Ninety One, Schroders, etc.
What can asset managers do to improve performance and hold on to assets in the midst of the passive revolution? Well, they can invest in their business. And as we saw on Wednesday, this means investing in people and processes. Hiring experienced portfolio managers with strong track records could help pick winning equities/bonds. In terms of process, changing active share mandates could help managers take more differentiated positions from the index too.
Unsurprisingly, the ‘transfers’ of portfolio managers don’t attract quite as much attention as footballer transfers. However, I thought I’d highlight a couple of key portfolio manager changes at Ninety One over the last few years here and here!
At Least There’s Skin In The Game…
So the passive revolution and the lack of outperformance has put a bit of a dampener on the optimism we had on Monday-Thursday! But we’ll end the week with a key point that makes asset managers - and in particular, Ninety One - pretty well positioned for challenges. And that point is staff ownership. More specifically, the amount of staff ownership the company has.
Nassim Taleb says in his excellent book ‘Skin in the Game’, that businesses should ensure that their key people have skin in the game. And by skin in the game, he means, have a stake in how the business does. Why is this important? Well, it means that the incentives of key people are aligned with shareholders. And that’s what we see at Ninety One. Important, key people (portfolio managers, top management) have shares in the business. So they are motivated to stay at the firm and ensure the company performs well. Otherwise their shares won’t be worth as much as they’d like!
We asked the question in the previous section about why directors and senior people at Ninety One don’t pay themselves more given how profitable the company is. Well, because they own so much of the company… they are paying themselves more when they pay out a dividend!
Over and Out(Performance)
So that brings us to the end of Week 4 of The Business Of newsletter! We hope you enjoyed diving into all things Ninety One. For decades, the asset management industry has had a phenomenal business model. However, the rise of passive investing and the continued lack of outperformance could shake the steady foundations! This week we’ve dug into;
(i) what asset managers actually do,
(ii) how they make money,
(iii) how much it costs to operate their business model,
(iv) what they do with their profits, and
(v) what the future might look like in the industry!
But it’s not quiteeeee the end. Because we have a special newsletter being released imminently!
It’s the next edition of our Career Talk newsletters. And this week we’re diving into Asset Management & Equity Research. I’ve been answering questions about how I got into my roles at Ninety One and Jefferies. What advice I’d give students wanting to get into either industry. What skills/books I’d recommend. And then finally explaining how asset management and equity research teams work differently!
17th Mar 2023
We hope you have a lovely weekend! And we’re back next Monday where we’ll be moving into the world of Luxury Goods and diving into The Business Of LVMH. It is sure to be a cracker.
Bye for now!
The Business Of Team