Coronation bleeding clients amid volatility

Jittery investors sent Coronation Fund Managers shares down nearly 3% during Tuesday’s trade, following the asset manager’s announcement that its interim earnings had been battered by market volatility and heightened client outflows.

Coronation’s revenue for the six months to March 31 2016, declined by 5% to R2.1 billion, which led to a 6.9% decline in its diluted headline earnings per share to 229.7 cents.

Citing a “highly volatile market environment and a decline in the level of performance fees generated”, Coronation also saw the value of its assets under management fall to R606 billion during the period under view, compared with R610 billion in the previous year. It recorded total net outflows of R48 billion.

Says Coronation CEO Anton Pillay in a statement: “Following an extended period of volatility in asset prices, client portfolios were well positioned to benefit from the strong rally in emerging markets, commodities, equities and the property market since the start of the calendar year.”

In its institutional business, which manages client portfolios of R380.4 billion, net outflows of R36.5 billion were recorded. This was expected as Coronation closed its South African equity and multi-asset portfolios to new investors almost four years ago. In light of this, the company has warned that shareholders should expect continued outflows from the institutional business in the years ahead. Despite this, the company says it continues to attract net inflows into its international products from global asset allocators.

Its retail business, with R225.9 billion in assets under management, saw its market share of long-term assets decline to 13.7% from 14.6% last year. As expected by management, total net outflows from the business unit were R11 billion.

Market pressures on earnings is something not unique to Coronation, says Capicraft Investment Partners portfolio manager, Drikus Combrinck. “Returns are under pressure industry wide, as valuations have come down not only in South Africa but globally as well,” Combrinck tells Moneyweb.

“The asset management industry is a cyclical business, but for a long time Coronation was not priced as a cyclical business,” he adds.

Market pressures have also seen the company, which traditionally distributes at least 75% of after-tax cash profit, cut its interim dividend by nearly 7% to R2.29 per share from the previous period’s R2.46.

Coronation is considered a bellwether in the asset management industry given the sheer scale of investments it manages, which Combrinck says can be problematic. “Scale is a problem at some stage in the asset management industry, as size impedes investment performance. Coronation derives its revenue from base fees in investment products and performance fees. And performance fees will be under pressure if base fees grow,” Combrinck explains.

Coronation’s outlook for the sector is bearish. It expects asset price fluctuations to remain heightened as investors “react to the news of the day”, says Pillay.

“It is in these periods of market turmoil that we are sowing the seeds for future long-term investment returns. In a world of change, our commitment to identifying those opportunities that will generate long-term performance remains unchanged,” he added.

Coronation’s shares were down 2.17% to R67.75 on the day.

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