Coronation Fund Managers becoming victim of own success

Asset managers face some unique challenges. For one thing, bigger isn't always better for the people who manage money. Coronation is a case in point. It currently has R547bn in assets under management (AUM). This is a huge amount, making it one of the biggest asset managers in the country. And with that scale comes challenges. First, it is difficult to grow from such a large base, so AUM are probably going to expand slowly in the future. Second, when a company has a lot of AUM, it becomes harder and harder to boost alpha, because a really big investment is necessary to move returns but such investments are difficult to make when you're a huge player. We should therefore expect Coronation's SA business to grow slower over the next few years, and its performance fees to perhaps decline as alpha is harder to deliver. Looking to fresh markets may be necessary for Coronation to avoid becoming a victim of its own success. – FD

ALEC HOGG: I guess many people have been getting a bit closer to their television sets to listen to this interview because Coronation Fund Managers is South Africa's most successful third-party management company – R36bn market capitalisation. It's just released again, a sterling set of first-half results, declared an interim dividend of R2.75 per share. Joining us for more is CEO Anton Pillay. Anton, good numbers and again, you cannot question those, but we did speak a little earlier to Paul Whitburn from RECM and he gave us some other insights into the difficulties that investors are now perceiving on Coronation. You're almost becoming a victim of your own success with these enormous R547m assets under management – almost the size of the South African economy. Where to from here?

ANTON PILLAY: Over the last two or three reporting periods we have cautioned the market against…with respect to the flows that we think we've been receiving specifically on the retail side. If you look at the retail side of the business for example, over the last six months we've pulled in about R17bn worth of flow, which makes up about 27 percent of the market.

ALEC HOGG: That's retail investors.

ANTON PILLAY: No, that's the unit trust side of our business, so it's about 17 percent of the market and that's versus our market share of 14.5 percent. Going forward, one would expect that to normalise to roughly between 15 and 17 percent.

ALEC HOGG: Paul was also talking about performance fees that would have come through in the last couple of years and are unlikely to be repeated. Just unpack that for us.

ANTON PILLAY: We don't disclose the level of performance fees to the market, but if one looks at the performance tables, both in the retail and in the institutional side of our business, you'll see that we remain in the top quarter across meaningful periods i.e. five and ten years. Going forward, just given the volatility we expect in the market, it is going to be more difficult to achieve those levels, the absolute levels of returns that we've experienced in the past.

GUGULETHU MFUPHI:  Paul also mentioned that perhaps you need to look at being a larger competitor on a global scale. Have you been looking at something like that?

ANTON PILLAY: Over the last seven years, we've built up our Africa and our Gem franchise, and we've experienced increasing interest from international asset allocators. Clearly, the performance of the gem market over the last 12 months has affected some of the flows of global emerging markets. We are also in the process of launching a global equity fund, but that's probably on in 2015/16.

ALEC HOGG: That's an interesting area that you're moving into. Clearly, global emerging markets or potential to draw funds there is a lot bigger than the South African market. Paul was saying 'you can't really move funds, given your size, outside of the Top 30 shares', but in the emerging markets…wow.

ANTON PILLAY: In 2012 – and bearing in mind that we're not asset gatherers, our main aim is to deliver performance to our clients – we did close a significant part of our institutional business to new clients. We simultaneously had the Gem and the African Fund. From a growth point of view, the Gem has and will obviously, in future periods, start to deliver with respect to the size of the business.

ALEC HOGG: How big is it – of the 547 – how is it split up? Africa, global emerging markets…

ANTON PILLAY: Of the 547-billion, roughly about 39-billion are my Gem products – the Gem strategy – and about 8-billion in the Africa strategy.

ALEC HOGG: That's still small, relative to the overall pot. Buffett says size is an anchor to growth. So far so good, but you must be losing a bit of sleep at night, given the size of the portfolio.

ANTON PILLAY: At R547bn, it is a sizeable business, but we believe it does have more positive aspects to it; for example, we are able to have a very sizeable investment team. They all sit in Cape Town and we manage global and local portfolios from the South African environment. In addition, when it comes to new issues, specifically on the bond side, we'd like to believe we are the company of choice as well, in terms of management approaching us. There are positives to the size of the business, but as I've pointed out, we did recognise that in 2012, we closed the institutional business due to too many flows, and that really was to protect the performance we want to deliver to our clients.

GUGULETHU MFUPHI:  You mentioned your team in Cape Town. Has it been difficult to retain some of the talent, especially as companies such as Stanlib and Sasfin are also looking to beef up on their asset management teams?

ANTON PILLAY: The team have been in place and have been together for probably the best part of ten to 15 years – the senior guys. The next level have been at the company for round about just over ten years as well, so we've had a very stable team and obviously, the stability of the team and working together does contribute to the performance/success of the company. Having said that, we don't follow a star performer approach. It is a team effort and on the back of that is another stability – in terms of the team – that contributed to the success.

ALEC HOGG: I would have thought they'd be very hard to poach but on the other hand, they might be getting a little bit fat and lazy with these kinds of profits that you're generating and this kind of dividend stream that you're giving to your guys, how do you keep them motivated?

ANTON PILLAY: From a company point of view, the culture of the company is one of hard work and delivering alpha to the client at the end of the day, so that provides one measurement in terms of how effective we are with respect to our clients. They obviously come first. With respect to the team, we are very aware of our size and our prevalence in the market, and we do make sure from a management point of view that the teams are managed.

ALEC HOGG: You didn't really answer the question, but I don't expect you to. What about the guy snapping at your heels? We know that Coronation and Alan Gray have really been up top there for many years now, but PSG seem to be coming up. Are they really going to be a contender?

ANTON PILLAY: If you look at Coronation 20 or ten years ago, we were the company that was snapping at the heels of the bigger players, so I think it's a natural progression in the market that you find new companies and smaller companies coming through the system. We're all chasing the same thing – the alpha – and return to the client. If you look at history, there've been companies that succeeded and companies that failed. We will continue to do what we do, notwithstanding the competition market.

ALEC HOGG: I want to ask you a specific one and I think this is quite an important question. If you were to invest in a company outside of your own, presumably it would Alan Gray. However, if you look past Alan Gray, is it the PSG, that's starting to snap at the heels? Whom are you watching out for?

ANTON PILLAY: From a performance point of view, I think Foord is coming through quite strongly if you look at the tables, and they've been delivering good results and performance to their clients so they'd certainly be one company that one would watch or invest in, if you could.

GUGULETHU MFUPHI:  Looking at your share price, it's up by just under 70 percent in the last year, so I take it you're quite happy with the investors.

ANTON PILLAY: As we've said, we don't chase the share price. We have a target share price in place. It's a reflection of what our investors feel the value of the company is. We have in the past, cautioned their expectations. That's what we're doing this year as well. We're asking shareholders and clients to reset their expectations.

ALEC HOGG: A cyclical company, but you wouldn't say it because you guys have been great. Well done again, Anton. I'm sure there's going to be a time that you'll be in the studio and we're going to be saying 'oh, my goodness. What's happened to Coronation?', but not right now. That's for sure.

ANTON PILLAY: Great.

ALEC HOGG: Well done. Thank you very much.

GUGULETHU MFUPHI:  Thank you so much. That was Anton Pillay, the Chief Executive of Coronation Fund Managers.