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% of AUM, Andreas Rialas, ARGO, Argo Group, asset managers, Charlemagne Capital, Dolphin Capital Investors, Ex-Cash Ratios, F&C Asset Management, Impax Asset Management Group, Investor Relations, Kyriakos Rialas, Miton Group, NAV discount, The Argo Fund, Third Point, UK
In April, I took a closer look at the universe of UK-listed asset managers. A key piece of research was a (relatively) simple analysis which focused on financial stability & market valuation – this study also offered a useful peer comparison with Argo Group Ltd. (ARGO:LN) (& see this recent post).
Frankly, the numbers (plus the rest of this post) speak for themselves, but let’s have a taste of the main highlights:
| Name | Ticker | Net Cash/Inv as % of Mkt Cap | |
| F&C Asset Management | FCAM | (23)% | |
| Liontrust Asset Management | LIO | 3.9% | |
| Henderson Group | HGG | 6.2% | |
| Aberdeen Asset Management | ADN | 7.9% | |
| Jupiter Fund Management | JUP | 8.4% | |
| Polar Capital Holdings | POLR | 16% | |
| Ashmore Group | ASHM | 18% | |
| Miton Group | MGR | 26% | |
| Schroders | SDR | 34% | |
| Man Group | EMG | 55% | |
| Impax Asset Management Group | IPX | 59% | |
| Charlemagne Capital | CCAP | 64% | |
| Median | 17% | ||
| Argo Group | ARGO | 175% |
It’s encouraging to see the entire sector now enjoys robust financial health. Only F&C Asset Management (FCAM:LN) is in a net debt position – all other companies sport net cash & investments on their balance sheets. But it’s also clear this healthy financial position is not the key driver of market valuations – for Argo’s peer group, net cash/investments only represents a median 17% of market cap. On the other hand, Argo’s $23.6 mio of net cash/investments amounts to a whopping 175% of its market cap.
[At Argo’s latest GBP 14p share price, net cash/investments still represents an unfortunate 160% of current market cap. To put it another way, you can now buy Argo for 62 cents on the dollar. In reality, the discount’s (far) larger – return all cash/investments to shareholders, and obviously Argo’s asset management business would continue to have some positive market value].
Asset managers would argue cash is needed for: i) financial stability & potential operating needs, and ii) potential fund seeding & investment. However, shareholder value’s obviously the over-riding priority, and asset management is ultimately a capital/asset-light business. The best metric to capture this balancing act for the sector is net cash/investments as a % of AUM:
| Name | Ticker | Net Cash/Inv as % of AUM | |
| F&C Asset Management | FCAM | (0.1)% | |
| Liontrust Asset Management | LIO | 0.1% | |
| Henderson Group | HGG | 0.2% | |
| Aberdeen Asset Management | ADN | 0.2% | |
| Jupiter Fund Management | JUP | 0.4% | |
| Miton Group | MGR | 0.7% | |
| Polar Capital Holdings | POLR | 0.9% | |
| Schroders | SDR | 0.9% | |
| Ashmore Group | ASHM | 1.0% | |
| Charlemagne Capital | CCAP | 1.1% | |
| Impax Asset Management Group | IPX | 1.4% | |
| Man Group | EMG | 2.9% | |
| Median | 0.8% | ||
| Argo Group | ARGO | 7.2% |
Argo’s net cash/investments amount to 7.2% of AUM, while the peer group works off a far leaner median of 0.8%. There’s no evidence of a size effect either – the smallest companies (MGR, CCAP & IPX) aren’t much different, with an average of 1.1%. Of course, if one briefly reviews individual manager AUMs, it’s quite clear this median level of net cash/investments has proved no deterrent to success in the sector…
There appears to be no impact on market valuations either – on average, I’d expect the sector to (generally) trade on a 2 to 3% of AUM multiple (on an ex-cash/investments basis). Here’s my latest snapshot:
| Name | Ticker | Mkt Cap as % of AUM (on ex-Cash/Inv basis) | |
| Polar Capital Holdings | POLR | 4.9% | |
| Ashmore Group | ASHM | 4.6% | |
| Jupiter Fund Management | JUP | 4.5% | |
| Henderson Group | HGG | 2.5% | |
| Man Group | EMG | 2.3% | |
| Liontrust Asset Management | LIO | 2.1% | |
| Aberdeen Asset Management | ADN | 2.1% | |
| Miton Group | MGR | 1.9% | |
| Schroders | SDR | 1.8% | |
| Impax Asset Management Group | IPX | 1.0% | |
| F&C Asset Management | FCAM | 0.7% | |
| Charlemagne Capital | CCAP | 0.6% | |
| Median | 2.1% | ||
| Argo Group | ARGO | (3.1)% |
In fact, the peer group’s valued at a median 2.1% of AUM – I generally consider the sector to be cheap, and it appears to contain a number of obvious (potential) bargains. Then we have Argo – which has the singular distinction of being awarded a negative value, of (3.1)% of AUM, for its asset management business.
All in all, whichever metric you choose, Argo’s ranking is generally…well, off the charts! This prompted me to send this follow-up letter to a recent meeting with Argo:
‘May 31, 2013
FAO: Andreas Rialas, CIO
Cc: Kyriakos Rialas, CEO
Michael Kloter, Chairman
33-37 Athol Street
Douglas
Isle of Man
IM1 1LB
Dear Andreas,
Both Guy [Thomas] & I want to thank you again for meeting with us at the end of April. I’d also like to commend you again for Argo’s admirable focus on costs & profitability in the past several years, in the face of declining Assets under Management (AUM) & performance fees. Our meeting provided welcome reassurance of your continued prudent stewardship of the company, and hopefully the H2-2012 AUM increase & your recent fund launch herald further gains in AUM. I’m now writing with a number of follow-ups:
i) We welcome your commitment to improve the level of info. & commentary re The Argo Fund (TAF) in future Argo reporting. The current share price implies a substantial discount is being applied to Argo’s investment in TAF – shareholders will obviously welcome the improved disclosure, and I believe it should prompt a general re-evaluation of this unwarranted discount.
ii) We also welcome your commitment to improve the level of disclosure re changes in AUM. Many of your peers now break-out Gross Subscriptions, Performance & Gross Redemptions in their AUM reporting.
iii) We are both shareholders in Dolphin Capital Investors Ltd. (DCI:LN). I’ve also been a shareholder in Third Point Offshore Investors Ltd. (TPOU:LN). Third Point LLC now has a significant 20.1% stake in Dolphin Capital, an additional investment in their convertible bonds, and they recently nominated a non-executive director to Dolphin’s board. Dolphin now intends ‘to make opportunistic investments in attractive distressed assets or other projects [‘particularly in Greece and Cyprus’] that may be NAV accretive for the Company, and which are intended to generate a significant return multiple on investment’. Bloomberg also recently reported Third Point is launching the Third Point Hellenic Recovery Fund to invest in Greek ‘event-driven corporate situations’.
Noting your own expertise & experience investing in special situations & distressed assets in the region, have you considering meeting with Dolphin Capital and/or Third Point to discuss potential business opportunities?
iv) Argo last reported $23.6 million of cash & investments, the majority of which is invested in funds you manage. As highlighted at our meeting, you consider this financial strength & fund commitment provides valuable support in your fund-raising efforts. However, I believe this is really a ‘nice-to-have’ – in my experience, an asset manager’s investment in funds they manage is a low-priority in terms of due diligence/RFP criteria for the vast majority of clients. But that’s a subjective opinion – the peer analysis (of UK-listed asset managers, see Excel file attached) I provided at our meeting offers an objective perspective:
Within the peer group, the median level of net cash & investments as a percentage of AUM is just 0.8%. Judging by the multi-billion AUMs across the board, this level of net cash & investments has clearly proved no impediment to their success in raising funds. In contrast, Argo’s net cash & investments amount to 7.2% of AUM, more than nine times the peer median.
It’s worth noting this low level of net cash & investments doesn’t appear to have had any negative impact on valuations either. For the peer group, net cash & investments represents just 17% of market cap, and they trade at 2.1% of AUM on an ex-net cash & investments basis. Argo’s net cash & investments, on the other hand, represents 175% of market cap, while the asset management business itself trades on a negative valuation of (3.1)% of AUM.
I think most shareholders would agree this presents compelling evidence Argo could return the majority of cash & investments to shareholders, and suffer no impairment to its future fund-raising efforts. Targeting this median 0.8% of AUM, Argo could distribute (via share buyback, tender, etc.) almost 150% of its current $14.3 mio market cap. That’s a return of $21 mio to shareholders (with over a third going to you & your brother). Of course, shareholders would continue to own an asset management business with nearly $3 mio in cash & $326 mio of AUM.
Again, we ask that you & the board consider a significant return of capital to shareholders.
I’d like to thank you in advance for your consideration of this letter & contents – if you have any questions, please don’t hesitate to contact me (email: wexboymail@yahoo.com). Please note I intend to publish this letter on the Wexboy blog in due course.
Kind regards,
Wexboy
OK readers, here’s the peer analysis file for your reference:
UK-Listed Asset Managers – Peer Analysis (xlsx file)
UK-Listed Asset Managers – Peer Analysis (xls file)
[Please note individual share prices & fundamentals may have changed since this April analysis]. Now, all that’s left is for me to ask:
If you have a direct/indirect shareholding in Argo Group (large or small), and would also like to see a substantial return of capital to shareholders, please email me at wexboymail@yahoo.com
Thank you!
Wexboy 
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Fri, June 14th: Small top-up in Argo Group (ARGO:LN) this week – now a 5.33% portfolio holding
Wex, how do you get comfortable counting Argo’s $18.5mm short term investment in The Argo Fund Ltd, Argo REO Fund and Argo Spec Sits Fund as cash in your calculations? The market simply seems to be discounting these investments to less than stated fair value, which might be reasonable given the funds’ performances.
See Note 11 of Argo’s final results – it’s all there, there’s no uncertainty regarding values: AREO’s valued at the year-end share price, while TAF & SSF are valued at their year-end NAVs (note they both report NAVs every month).
btw I used balance sheet values, for simplicity, in the post above. As of today, you could adjust for small Cyprus losses & also a decline in the value of the AREO stake (easy to calculate, the no. of shares held is also included in Note 11) – but I expect potential YTD cash generation & investment gains more than compensates…
These are mostly fixed income assets, I believe. Unless something spectacular happens, I think it’s reasonable to assume principal won’t be impaired (even if they underperformance their peers)
Wex. This is not a good one….sub scale fund in an asset class that is seeing outflows with poor performance. I think you will have to release this one back into the wild
You should short it to death….
I will moon walk down the m50 dressed in a Barney the dinosaur outfit if an EM asset manager with $300mn AUM pays out a dividend with a rising $ and US 10 year yield given external $ EM debt.
I really don’t get the comment – maybe something missing? – in fact, the $ has been weakening recently, and Argo just paid a dividend!
But I do like the Barney notion – if you could polish your act in time for the Xmas panto season, you’ll make a decent amount of dosh.
How much cash do they need to run this business for 2 years assume a drop in mngt fees by 1/2 and no performance. It’s probably a decent amount. People remember 08. And everyone knows Cb activity is another bubble. They will not give you additional cash. People know how cyclical funds are.
You’re implying a 50% drop in AUM – in that scenario, the asset management business would obviously be worth more dead (i.e. sold) than alive.
I agree with the majority of comments made regarding the fundamentals of the business. This includes but is not limited to the following:
– The performance over the past years has not been great
– One swallow does not yet make a summer, so performance YTD may not be persistent.
– Their business model might be overcharging for the services delivered and may be doomed to fail
– Management may be more incentivized to sit and earn their paycheck instead of unlocking value.
– Emerging markets may collapse and cause large drawdowns.
While these risks are there, the natural risks of a net net are not here. By natural risks I mean a high debt load, low/negative FCF and/or an antiquated business (ie Radioshack). Additionally, the above mentioned risks are why the stock is so cheap, but does not imply the business is currently worth only 60% decline in TAF, fraud or a lawsuit related to Fromm, which are all low probability events, I can’t see how I am going to lose money. If the business only returns to more stable waters, a price close to NAV should be in the cards, this implies a 100% upside at the least.
Again I can sympathize with the arguments made, but this does not imply that it will be a bad investment. It just seems like a very lopsided bet to me.
A sentence seems to have been erased..
I agree with the majority of comments made regarding the fundamentals of the business. This includes but is not limited to the following:
– The performance over the past years has not been great
– One swallow does not yet make a summer, so performance YTD may not be persistent.
– Their business model might be overcharging for the services delivered and may be doomed to fail
– Management may be more incentivized to sit and earn their paycheck instead of unlocking value.
– Emerging markets may collapse and cause large drawdowns.
While these risks are there, the natural risks of a net net are not. By natural risks I mean a high debt load, low/negative FCF and/or an antiquated business (ie Radioshack). Additionally, the above mentioned risks are why the stock is so cheap, but does not imply the business is currently worth only <50% of NAV. Barring a 60% decline in TAF, fraud or a lawsuit related to Fromm, which are all low probability events, I can’t see how I am going to lose money. If the business only returns to more stable waters, a price close to NAV should be in the cards, this implies a 100% upside at the least.
Again I can sympathize with the arguments made, but this does not imply that it will be a bad investment. It just seems like a very lopsided bet to me.
Well said, sir..!
Of course, I can’t help noting circumstances can change and companies/stocks can always go horribly wrong! So…you have two choices: a) never buy another equity ever again – I guess buy bonds instead, see how that works out…, or b) perform your research & analysis, play the risk:reward odds as best you can, create a diversified portfolio, and…enjoy!
Check out Aberdeen and Ashmore today ….
Great – I like ASHM, but I’d need to see it cheaper to think about buying it…
I can’t seem to post on the Alternative Asset Opportunities section of the blog, but I thought readers would be interested in this link. I recently attended a speech by a professor from London Business School who has been looking at the secondary life settlements sector. His conclusions are already known to us wise followers of Wexboy: High and uncorrelated returns. The reason I think this is interesting is that attention from academia will raise the profile of the asset class and validate it, in some people’s eyes. I like this development. As such, I am going to take another look at that US fund that is similar to TLI – the name escapes me for now.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2278299
Thanks, Tom – I look forward to reading. Comments are probably closed now on my TLI article – once I read this, I can likely post it there myself.
$IFT is presumably the fund you mean. $LPHI has a related business (but most definitely have their own set of problems) – there’s also a similar UK company, but it seems like such a joke it doesn’t bear naming…
Would you mind naming in anyway? I’m keen to read all the information that is out there. Thanks in advance.
Right, fortunately NAVs for the Argo fund and Argo Distressed credit are up 16% and 36% YTD respectively. Might allay some fears about their poor performance.
Not really. Outperformance is easy in the short term through luck or leverage. What matters is performance over the long term. Over 6 months, a monkey has a 50% chance of outperforming the benchmark.
These guys are guilty of several of the things that give hedge funds a bad name:
– Choosing a meaningless and easy benchmark that has performed badly.
– Timing the launch of new funds at opportune times, so as to maximise the chances of good performance. Look at when the distressed fund launched.
http://www.trustnetoffshore.com/Factsheets/Factsheet.aspx?fundCode=CVFA1&univ=DC
http://www.trustnetoffshore.com/Factsheets/Factsheet.aspx?univ=DC&fundCode=EIFG0&pagetype=overview
http://www.trustnetoffshore.com/Factsheets/Factsheet.aspx?fundCode=CVFA1&univ=DC
And have you seen the performance of the Argo Real Estate Fund? A complete shell of a company, overlevered, and regularly breaking covenants. It has only option value.
If you believe that there is long term value in this business, I believe you are wrong. The hedge fund model is discredited, because how can you charge 2 and 20 in a low interest rate environment? All the institutional money is going to established names – the Brevans of this world. This leaves this investment a classic Ben Graham net net – a melting ice cube. The problem is, as I said, that management have every incentive to carry on taking a salary for as long as they can. They can last for years. Yes, you will earn a 9%ish dividend yield, but what’s the point when intrinsic value is going to fall?
Again, see my other answer.
As regards the hedge fund industry, I don’t doubt it will continue to grow/go from strength-to-strength. I agree there is an increasing share going to the largest hedge fund groups – but that’s a continuing ‘flight to quality’ reaction to the credit crisis. Of course, their increasing funds & institutionalization will inevitably compress their returns, caused by their size & increasing level of risk control. Which, equally inevitably, cycles money back into smaller/younger hedge funds.
I’ve never thought of Argo as a value trap – don’t forget, most companies that are net net type bargains often have an atrocious business, atrocious management & are continually losing money. None of that applies to Argo – how many businesses do you know of who maintained cash/underlying profitability in the face of substantial declines in their core business (AUM, in this instance)? Now AUM appears to have stabilized & returns are picking up. Ignoring their surplus cash/investments for a minute – the only thing missing operationally from this business is sustained/significant success on the fund-raising front – now is the ideal time I believe to remedy/attack that issue, as I’ve pointed out.
Ok, it sounds like our key disagreement is on whether management are any good, and there is a decent business here. Maybe I am being a little dismissive because with the level of cash they have and the dividends being paid, there is a lot of downside protection. Weirdly, in my view, it would be better if the business collapsed, and there was a liquidation. Anywhere, happy to watch from the sidelines and see how this plays out. Goodl uck!
Floris – Ta 🙂
Wait for May/ June / July. EM meltdown only starting…
Crikey – you might want to exit the market completely if you believe that – I wouldn’t hold out much hope for the developed markets if the emerging markets are going for a Burton..!
Anyway, frontier markets is where it’s at…
I’m sorry to say that I think Argo will not work out well. They are bad asset managers. Anyone who looks at their long term record can see that. Further, they are incentivised to take money out of the company by sitting tight and paying themselves continuing high salaries. Why give money to shareholders, when they could pay it to themselves by sitting tight and doing nothing?
Tom,
I don’t agree – TAF & ADCF have v respectable CAGRs. and SSF is a work-in-progress. As for AREO – well, we’re all guilty of excess & delusion during the boom years: Like pretty much all funds launched then, prices & potential weren’t attractive enough, and leverage was far too high – a lot of those funds are now gone, but AREO still lives to fight another day. The only sensible answer to all our credit crisis disasters is to move on, lessons learned… You also have to remember Argo’s style of investing is ‘lumpy’ & event-driven.
Total compensation for the Rialas brothers in 2012 was $449 K.
Regards,
Wexboy
Are you long DCI then? I had missed that! I am long DCI too, at 32p, Lots of pitfalls along the way though. DCI purchase of land from the Orthodox Church could be challenged I heard, also Panama in massive oversupply in the luxury sector.
Ooh er, did I say that?!
Actually, I haven’t written about DCI on the blog, to date. Fascinating fundamentals, plus risks of course – and the shareholder register is a veritable Who’s Who of the investment world! Technically, DCI looks v interesting right now also…
Also just looked at returns. Pretty poor last 2 years. If people were pulling out of EM these guys would be at risk. Having $3mn cash on hand is pretty important if your assets 1/2 and you need to retain talent
These guys are EM focused right? If that is the case then becareful. It is well documented that fed tightening harms EM markets and asset allocation. You can see what happened to the Thai stock market, Australian $ in recent weeks for example. External $ debt becomes an issue for EM in a tightening cycle (which has started…I.e guess what a US recovery actually may be in place). I am not surprised it is cheap as operating leverage works both ways in asset management businesses.
Batboy,
I get your point, but no matter where the developed markets stand people can always paint a bad scenario for emerging markets…and yet their fundamentals, their returns & their prospects are far better! Personally, I like that kind of exposure 🙂
Actually, a significant portion of Argo’s fund exposure is inextricably linked to Europe’s fate for the moment. But bigger picture/longer term investing in distressed/special situations against a background of emerging market growth is a wonderful investment thesis – something Ashmore Group’s focused on too.
As regards performance, distressed/special situations returns are often ‘lumpy’ & often respond to listed market performance on a delayed basis. Argo racked up some v nice fund returns in H2-2012, and I expect more of the same in 2013.
Your point about spare cash would apply to any asset manager that goes into reverse – I see no reason to believe Argo requires special ‘reserves’ vs. what its peer group believes is prudent.
Regards,
Wexboy
With compliance now $250mn has become the new $100mn to keep a fund going. What AUM these guys at. Crossing 250 from below is great. From above it is good night Vienna.
Yes, them’s the risks you take…
Argo’s done an excellent job of reducing costs to match declining AUM/revenues since 2008. AUM appears to have stabilized now, but if there was another shock decline in AUM, there’s obviously a limit to the level of P&L adjustments they could still make. If that happened, I don’t think management (as major shareholders) is interested in running a loss-making business any more than the rest of us – the AUM would be better off sold in that event…