At Urbem, we cannot love small- and mid-caps enough. We believe that this is our best "fishing ground" to explore high-quality businesses that have gone unnoticed for years among not only investors and research analysts but also potential competitors.
The currently ?4 billion GBP (approximately $5.19 billion USD) market-cap Ashmore Group (LSE:ASHM) is one of our cases of interest. The UK-based asset manager pioneered the emerging markets niche at the time when such an investment style was widely considered untypical and risky.
In 1998, Mark Coombs founded investment manager Ashmore as a new division of Australia and New Zealand Banking Group (ASX:ANZ), then led a buyout a year later and took it public in 2006. Fast forward to today, and Mr. Coombs is still CEO of the company, with an equity stake of over 37% in the company. With specialization and pure focus in the emerging markets, the business operates funds covering a wide range of asset classes, including debt, currency, equities and special situations. At the end of 2019, clients in Europe (excluding the UK) accounted for nearly 28% of the total assets under management (AUM), followed by their Americas- and Asia Pacific-based counterparts with a 23% contribution each.
We think that the business model at Ashmore is at the intersection of two sweet spots - emerging markets and debt markets (nearly 85% of the company's AUM), both of which are less prone to market efficiency hypothesis and the prevalence of passive investment vehicles (and hence, the "race to zero").
The company currently manages approximately $100 billion in assets, with a total staff of 310 employees. By comparison, its major domestic peer Schroder PLC (LSE:SDR) has AUM of $572 billion and 6,000 employees, global investment manager BlackRock (NYSE:BLK) has $7,400 billion AUM and 15,000 employees, and money market specialist Federated Hermes (NYSE:FHI) has $575 billion AUM and 1,900 employees. Ashmore Group is the smallest in both measurements among the above select peer group, but it is one of the most efficient in terms of AUM per employee.
A further examination of the return on capital confirms the small size and niche focus advantages. As you can see below, Ashmore consistently generated high free cash returns on assets for more than a decade, roughly matching the performance of Federated Hermes and beating both BlackRock and Schroders by a wide margin.
In our opinion, the competitive edges at Ashmore come from its outstanding track record and reputation, which are earned through market cycles for decades and are therefore difficult to replicate by competitors in the short term. The company's investment philosophy is well recognized by major rating agencies, including Lipper and Standard & Poor's. A life-long dedication to building its core competence in the emerging markets niche also widens the moat with abundant know-how in accumulation. At the same time, we see a "healthy" client base, which overweights institutions such as central banks, pension funds and sovereign wealth funds.
The stability of the client base (only 13% intermediary retail) and less economic sensitivity of debt instruments make Ashmore Group more recession-proof than many other asset managers in our view. According to the chart below, the business managed to increase both its revenue and operating income throughout the 2008 Financial Crisis.
Going forward, Ashmore Group plans to focus on expanding its equities and retail AUM. For the medium term, the company plans on expanding its distribution network with the aim of increasing the proportion of AUM from emerging markets-domiciled clients. In the meantime, the management believes in the favorable upcoming structure shift due to the gap between currently underweighting allocation in indices and portfolios in general and the high growth potential of emerging markets. In aggregate, emerging markets represent 86% of the world's population, 76% of forex reserves and 59% of GDP, the management cited.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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This article first appeared on GuruFocus.