Coronation already shot the lights out – so what to call another 110% profit surge off high base?
Quantitative Easing – the fancy name for the US Federal Reserve's money creating machine – has pumped liquidity into the world, pushing down the price of money and up the value of assets. The big winners have been those whose income is linked as a proportion of those assets. In a local sense that's the big fund managers. Investec Asset Management's staff love their business so much they have borrowed big to buy a slice from owner Investec Ltd. Looking at the latest set of financial results from the only major listed asset manager, Coronation Fund Managers, it's not hard to see why the Investec guys are prepared to put their houses on the line. Coronation is having an amazing 20th year – earlier in the month it was named top of the Sunday Times's Top Performing Companies list which measured all-in return to shareholders; and today its financial results to end September reflect a 110% surge in headline earnings from the already high base. CEO Anton Pillay came through to explain the phenomenon on our CNBC Africa Power Lunch show today. – AH
ALEC HOGG: In the year to end September, Coronation Fund Managers has reported a 45 percent increase in its assets under management to almost half a trillion rand. Headline earnings per share were up 110 percent. Joining us now as we unpack these numbers is Chief Executive Anton Pillay. What a way to have your 20th year, Anton. You've now won Best Performing Company on the Johannesburg Stock Exchange for the past decade and you doubled the profits from that high base. I don't think you have to be a genius to say this surely cannot go on indefinitely.
ANTON PILLAY: That's quite correct, Alec. As we said in the SENS announcement this morning, our business is cyclical. We believe that the alpha that we generate is lumpy. We also believe that from an alpha generation point of view, the outperformance that we generate for our clients – we are at a cyclical high. Our revenues are highly geared to both the market and the alpha that we generate for our clients and we certainly don't believe that it's sustainable at these levels going forward.
ALEC HOGG: It's an extraordinary story, because if you keep performing in the top quartile as you have done, you just get more and more successful. As you say, the alpha or the excess over the benchmarks, is not that big when you look at it in absolute terms – three and a half percent. However, over a sustained period of time, it feeds on itself and you get this enormous amount of money that you are generating. Well done to you.
ANTON PILLAY: Thank you. It goes to the heart of the company, which is really about investing for the long-term. I think your point is very valid and very accurate in that if you look at the alpha or if you look at the growth on an annual basis, you'll see the spikes, troughs, and peaks. However, if you look at it over five or ten years – which is really where we aim to outperform – you'll see that two or three percent on an annualised basis, does ultimately generate the required returns for the clients.
ALEC HOGG: Just to go back to the beginning of this business – Leon Campher and Tony Gibson, who were at Syfrets Asset Management at the time – had a fallout with Syfrets Asset Management, spoke to Dave Barnes, and here we go. Twenty years later, you have this incredible business. However, Leon's big saying – and I remember it so well from those days – is 'there are two things you must never do. You must never become arrogant or complacent'. With this kind of generation of profits, how do you guard against that today?
ANTON PILLAY: We're quite aware of both those pitfalls and we try, within the business, to guard against the arrogance. In communication with the staff internally, we try to make them aware that we have to remain humble in respect of what we do on a day-to-day basis, and that without our clients we ultimately have no business. We are therefore here to serve the needs of our clients, and I think that has helped to focus the mind when the tendency towards arrogance does settle in. However, to a large extent, I'd like to believe that we've remained humble in serving the needs of our clients.
GUGULETHU MFUPHI: Just on the long-term investments: you mentioned that it will be a tough trading environment and you've put certain measures in place to protect yourself from the turbulence – so to speak – that you might experience. What kinds of measures are those?
ANTON PILLAY: Our revenues are highly geared to the market, so you've seen, the JSE has generated 27 percent over the last year. Over the last five years, it's generated just under 17 percent a year. We certainly don't believe that those levels are sustainable levels, looking into the future. Our sole focus will be on delivering long-term investment performance through the cycle, to our clients. All we can really do at this point in time, is work through the noise, which is what we do on a day-to-day basis. The guys value the shares. They look past the noise over the short term and look towards normalised earnings, and they value those shares over the longer term. Ultimately, the goal is to outperform the market.
ALEC HOGG: You've almost become a bit like Allan Gray had to, when they got so big, and that's to take big bets. Astrapak: Coronation decides Astrapak is a turnaround situation. You have everybody coat tailing you and running with Astrapak. Is that increasingly becoming part of your business strategy – to find companies that you can take a big chunk out of?
ANTON PILLAY: I don't think it's necessarily part of the strategy. As I said, we will value the companies found. If we believe that they offer value over the long term, we will invest in them. I think successful asset managers do buy large and attract more flows. If you look at our business model, we've closed about 75 percent of our institutional business, to new clients – on the institutional side.
ALEC HOGG: Just explain that.
ANTON PILLAY: At the beginning of last year, we sent a notification out to our clients, specifically on the equity mandates, balanced mandates, and absolute mandates that we would be closing our institutional portfolios to new clients at the end of December last year.
ALEC HOGG: That means you're not taking in any more money?
ANTON PILLAY: We're not taking in any new clients. We will still continue to take money from current clients, but not from any new clients.
ALEC HOGG: Buffett says size is an anchor, an anchor to performance. He says if he could go back to the beginning, to be small again he would perform far better. You're sitting on nearly half a trillion rand's worth of assets. Do you think he has a point?
ANTON PILLAY: We want to deliver alpha to our clients and we believe size does obviously affect our ability to deliver that alpha. As I've said, we've shut down the institutional business regarding new clients. On the retail side, we're pulling in about 25 percent of the industry flows, which is nearly double our current market share (13.6%), so we don't believe it's necessarily sustainable in the future.
GUGULETHU MFUPHI: Just on your asset fund management: that increased by 45 percent this year and recently we also saw the surprise increase in your stake in Clicks, which came as rather a surprise to the market. With identifying jewels as you mentioned for the market for the long term: how do you go about that? It seems as though you surprised many people.
ANTON PILLAY: We have an internal team of portfolio managers and analysts who perform their own internal evaluations – their own in-house evaluations. Based on those evaluations, we have a ranking table where we will rank our internal evaluation relative to what the market offers or the share price of what that particular stock is. On the back of that, we will either include it or exclude it from the portfolios.
GUGULETHU MFUPHI: Just on that: are you looking to increase the number of assets on your management? They have increased by 45 percent. Could that go even higher in the next year to come?
ANTON PILLAY: We're not asset gatherers by nature. We have no target in particular, so we don't have a target of R700bn now that we're sitting at R492bn. The main goal is to deliver the alpha to the clients and to the extent that a particular mandate – the size of the mandate – detracts from that ability, we will soft close the mandate as we've done with the institutional business
ALEC HOGG: It's a lovely business, as we were saying before. R3.6bn in revenues coming in, you spend about R1.7bn so there's R2bn worth of profits, which you distribute via dividends after paying tax. How many people share in that R1.7bn of expenses?
ANTON PILLAY: The expenditure…it's a range of people, so on the variable side of the expenditure…
ALEC HOGG: How many staff members do you have?
ANTON PILLAY: We have 246 staff members.
ALEC HOGG: 246 staff members, and of the R1.7bn in costs, how much of that is people? I'm trying to find out if my daughter should come and knock on the Coronation door.
ANTON PILLAY: I think the important thing to look at with regard to that…
ALEC HOGG: Answer the question. What percentage of the cost is people-related?
ANTON PILLAY: I'd say roughly about half.
ALEC HOGG: Okay, so your people are earning about R800m per year between 240 of them. That's a pretty good return. How do you keep them motivated? How do you keep such rich people actually wanting to come to work every day and work hard?
ANTON PILLAY: It's very difficult. The way we incentivise people is that the cash portion of their earnings is relatively small, so on average it will make up about 30 percent and the rest of it ranges from between three to seven years in terms of remuneration. That's how we keep them incentivised and motivated.
ALEC HOGG: Anton, keep getting into that top quartile and next year you might be the top company in the Sunday Times survey again.
GUGULETHU MFUPHI: I just wonder if they have vacancies, Alec.