The Business Of

Ninety One | What Do They Do?

Happy Monday All!

Welcome to Week 4 of The Business Of newsletter. We hope you had a lovely weekend and are ready to get stuck into another business model!

This week, we move into the world of asset management. And specifically we’ll look at the company, Ninety One.

Now, many of you may not have heard of Ninety One. That’s because the company was previously called Investec Asset Management. You may be more familiar with Investec… probably because of its marketing at sporting events!

The Investec Group used to comprise of Investec Bank, Investec Wealth Management and Investec Asset Management. And then in 2020, the Investec Asset Management business was separated and listed as Ninety One on the London Stock Exchange.

So, that’s a brief background. Let’s dive into what asset management companies like Ninety One actually do… because it’s not as straightforward as you might think!

Asset Managers… Manage Assets, Duh!

Hmm yesssss, but what does that actually mean? And whose assets are they managing? Well, this link shows us that the majority of assets managed by UK asset management firms comes from pension funds.

Whilst most pension funds have in-house asset managers that manage their pension pots, some pension funds decide to outsource their asset management. In mid-2021, we saw British Airways (who has one of the largest UK pension funds) move from managing their pension pot in-house to picking an asset manager (BlackRock) to manage their pension. And the illustration below tries to help explain how the process works when pension funds outsource their asset management.

So, asset managers like Ninety One and Schroders (another UK asset manager) receive money from clients. The money they receive from clients is called assets under management (AUM). Ninety One will then invest this money in various asset classes in a bid to increase their clients’ original sum.

Clients are usually split between the institutional market and the advisor market. Institutional clients include pension funds (e.g. BT Pension Scheme), sovereign wealth funds (e.g. Abu Dhabi Investment Authority) and insurers (e.g. Aviva). The advisor market includes large retail groups, wealth managers and intermediaries (e.g. Hargreaves Lansdown) serving individual investors.

More Money Please!

Pension funds, sovereign wealth funds and even retail investors (people like us!) are all after a similar objective. We all want to increase the future value of our money.

Retail investors often want to invest their savings so they can generate extra income for retirement or for their kids’ university fees. For employers with pension funds, they want to invest their contributions such that they can generate the retirement income their employees are after.

However, there is one problem. What on earth should they invest in?! The majority of retail investors and even many employers don’t have the knowledge and expertise to invest with confidence. And this is where asset managers step in. Pension funds, sovereign wealth funds and retail investors give asset managers the responsibility to invest their money without taking too much risk.

Asset Allocation vs Security Selection

So, now pension funds have given asset managers the responsibility to manage their money, can asset managers invest in whatever they like?

Well not exactly - pension funds still have the responsibility of asset allocation (deciding which asset classes to invest in). Pension funds will decide what proportion of their assets they want in equities, in fixed income, etc. And then it’s up to the investment teams at their asset manager to choose the underlying securities. This is called security selection. Last year, we saw an example of this - the National Grid UK Pension Scheme appointed Russell Investments to manage their pension pot. However, National Grid kept responsibility for asset allocation.

The two main asset classes we see asset managers invest in are equities and fixed-income. The chart below shows that 47% of Ninety One’s AUM is invested in equities and 25% in fixed income.

Hypothetical example: So let’s say the BT Pension Scheme gives £500m to Ninety One and the Scheme wants to invest 60% of that in the Global Equity Fund and 40% into the Fixed Income Fund. The analysts and portfolio managers in the Global Equity Fund will analyse and select equities (e.g. Apple shares, Microsoft shares, etc) that they think will be good investments and make their clients a good return on their £300m. And the analysts and portfolio managers in the Fixed Income Fund will analyse and select government and corporate bonds (e.g. UK 10-year government bond, Sainsbury’s bond) that they think will be good investments and make their clients a good return on their £200m.

13th Mar 2023

Nigel Jacob CFA