The Business Of
Ninety One | What Do They Do With Their Profits?
Morning All!
So, we’ve covered a good amount of the asset management industry this week. And in case you’re feeling like this…
… let’s have a quick recap of the main points!
AUM: Ninety One manages £144bn of assets from pension funds & others.
AMC: The company charges on average 0.46% across their mutual funds.
Net Revenue: This gives them a net revenue of £633m (£144bn x 0.46%).
Margin: Even after high employee costs, EBIT margins are very high @ 32%!
We mentioned yesterday that a 32% EBIT margin is incredibly impressive and doesn’t come around too often. Asset managers like Ninety One are highly profitable and have strong cash flows in most years. And so today, we’ll focus on what Ninety One actually does with all its profits - do they (i) return cash to shareholders, (ii) keep cash on the balance sheet, or (iii) reinvest cash back into the business. Without further ado…
What’s Mine Is Yours…
Let’s start with how Ninety One spends the majority of their profits/cash… and that’s dividends. A large chunk of asset managers’ profits go towards returning cash to shareholders.
As we saw with Tesco, Ninety One’s dividend strategy is to pay out a minimum of 50% of profits as dividends. But as illustrated in the chart below, Ninety One have actually been paying out closer to 75% of their earnings (EPS) as dividends (DPS) over the last 3 years.
A higher payout - shareholders will not be complaining!
But Why Don’t They Invest In Growth… Or Just Pay Themselves More?!
Great question! So cash return to shareholders (through dividends) is clearly a big use of cash. But what about reinvesting back into the business? We saw for Tesco that reinvesting looks like automating warehouses and for Man United that looks like purchasing the best players. What does it look like for Ninety One?
Well, for asset managers like Ninety One, similar to Man United, growth comes from having better people. Better, smarter, more experienced investment analysts and portfolio managers should be more likely to identify stocks/bonds that will outperform. Better, more experienced salespeople should be more likely to engage better with potential clients and win business for Ninety One.
However, the process of bringing on new employees is vastly different in the asset management industry compared to the football industry. Remember, if Man United wants to acquire a footballer from another team, they usually have to pay the other team millions for the transfer. However, if Ninety One ‘acquires’ a portfolio manager from Schroders, Ninety One don’t have to pay Schroders millions for the ‘transfer’! They just pay the portfolio manager his salary.
And so after investing in employees (through good salaries + bonuses), there are very few areas where the company’s profits can be reinvested for growth. It’s best to return that money to shareholders - and that’s exactly what we see most asset managers do…
The chart above really is very unique - such high dividend payouts (consistently over 50%) are rare. And some of you may be wondering - why do these companies pay such a high dividend to shareholders? They have this load of cash every year. Why don’t they just pay themselves (staff) more before giving cash back to shareholders?!
16th Mar 2023
Well, as we’ll see tomorrow in the ‘’ segment, these dividends do actually benefit employees too (in quite a unique way)… tune in tomorrow to see how!
Have a cracking day!
The Business Of Team