Key Numbers
AUM down 4.1% to $61bn. Net outflows of $2bn and negative investment performance of $0.6bn.
Analysis
Ashmore has been on the Mercurius Research "blacklist" for a while. My view is that the company is wildly overvalued for what it is: a play on emerging market debt. Emerging market equity is, in places, a reasonable bet but EM debt just looks terrible. History suggests that you frequently get investor herding in the space and Ashmore is the big sheep in the herd. Ashmore has benefited once from emerging market investors putting money into their funds and again from the bullishness of investors in these markets. I believe that Ashmore will pay twice when these trends reverse too.
So far, this thesis has proved correct. Ashmore has experienced large outflows even through a period when some of the most shaky emerging markets, Turkey for example, benefited from an improvement in their condition. However, the stock price has actually held up over the past six months and we are now towards the intermediate highs.
I believe the main reason for this is the strength of the dollar, Ashmore largely earns in USD but is listed and reports in GBP. The GBP has gone through the floor against the USD and whilst this hasn't offset the fall in earnings caused by the AUM completely it has certainly painted an improved picture.
I see no particular reason to change my fundamental view here. What I see is a stock that does have a great balance sheet but has a huge amount of downside risk, due to this "double dip" effect that it benefited from after 2008. I can see why investors would pay, remembering the balance sheet is solid, something like 8x PBT for this but I really have no idea why they would pay almost 14x.
To me, this just doesn't make sense, what is the upside? Ashmore has started marketing to retail clients in emerging markets, apparently this will be the new source of growth...seriously? The best case scenario is really that things don't get worse. The upside is then maybe 10-20%. The downside is that we get a serious run on emerging market debt and this goes, at the very least, down 50%.
To be very clear, a 4% fall in AUM means that PBT is down at least this amount if the company doesn't cut back on costs (which is a real risk to the bear thesis…
