Ashmore is battling customer churn while emerging markets face a bumpy ride

On February 23, senior officials at the UK’s most prominent emerging markets fund manager issued a forecast on Russia.

Many countries, including the US, had warned that an invasion of neighboring Ukraine was imminent. But while Ashmore’s strategists began their briefing by urging investors to be cautious, their conclusion was clear: top executives at the FTSE 250-listed group did not believe that Russian President Vladimir Putin would launch a full-scale invasion.

In fact, by the end of January it had accumulated nearly €143 million in Russian government debt – when more than a hundred thousand Moscow troops massed at the border, according to Morningstar data covering the group’s publicly available funds.

In the early hours of the next morning, Russian troops crossed the border and the war began. By the end of February, the value of Russia’s debt had fallen by 80 percent; A month later, money managers across the industry wrote it down to virtually zero.

Ashmore, who has £64bn in assets under management, wasn’t the only investor caught off guard. “Everyone was wrong about Russia, very few funds had no exposure to Russia. It wasn’t a controversial view,” said an emerging markets fund manager at a competitor.

Still, the bad bet heightened investors’ nerves given the years-long downturn in emerging markets that has weighed on Ashmore’s performance and profitability. Assets under management are down a third since last September, and the stock is down the same amount year-to-date.

Many shareholders say they plan to stay with Ashmore, which for most is synonymous with founder, chief executive and largest shareholder Mark Coombs.

“It’s a good business that’s well run, with a lot of shareholder voting, but one person dominates so it gets idiosyncratic,” said an industry veteran. “The more idiosyncratic bets there are, the more people worry that things are under the floorboards.”

perfomance

Ashmore’s ethos is that it’s bullish on emerging markets — which offer higher growth but greater risk — any time of the year. It had early success pioneering investments in emerging market debt and frontier market equities, arguing that clients could take advantage of lower prices in downturns to increase their allocations.

The London-based company has weathered market cycles for three decades. But high-profile contrarian claims that Chinese property developer Evergrande will repay bondholders and a $1bn bet on Lebanese sovereign debt, though many pundits have concluded the Levantine country won’t repay, have strained nerves.

More broadly, the case for investing in emerging markets has become much weaker as growth rates slow and economies are hampered by the fallout from fighting the pandemic – even as western central banks hike interest rates and the dollar strengthens.

Customers withdrew $6.6 billion in the three months ended June and profits fell 58 percent year over year. Hedge funds have increased their bets that stocks will fall further.

While Ashmore’s investors and clients are prepared to anticipate ups and downs, only 28 percent of investments have exceeded their 3-year benchmark, the company said, in the 12 months to June, up from 57 percent in 2021.

“They’ve never gone that far before, so we’re breaking new ground,” said one analyst. “They’re very active and doing what they’re supposed to do: make contrary decisions from the top down. But this contrary balance has not worked in two to three years.”

Ashmore has insisted it will not change its approach, arguing that emerging markets will bounce back once there is further clarity around the end of the US Federal Reserve’s rate-hiking cycle.

When reporting the results in August, Coombs told shareholders, “History shows that after a period of market dislocation, the subsequent recovery and the outperformance achieved through Ashmore’s investment processes has been significant.”

Many support this view. “The record shows they’re very good at that,” said Panmure Gordon’s Rae Maile. The investment philosophy is, “When everyone is fearful, we add risk to the portfolio and we know we’ll get it back. . . They do what they say and that’s what customers want.”

But another competing investor said Ashmore’s size is problematic when things go bad: “[They]have to paint glitter on a turd because they are stuck owning the market in a bear.”

Coombs and culture

One concern is the perception among shareholders, analysts and former employees that almost all decisions are made by Coombs.

Ashmore was formed in 1992 when Coombs and six other founding executives spun it out of the Australia and New Zealand Banking Group (ANZ). The company was listed in London in 2006.

The billionaire is notoriously private and doesn’t speak to the media and rarely to analysts, leaving that to the group’s finance director Tom Shippey and Paul Measday, head of investor relations. Coombs declined to be interviewed for this article, while Ashmore declined to comment.

Internally, however, Coombs, who has been CEO since 1998, remains at the heart of the operation, the only one of the founding generation still with the group.

He is described by current and former employees and investors as having a relentless focus on the company and nurturing client relationships, but also being impatient and reluctant to delegate.

As other founders have left the group, the number of people of stature to challenge him also seems to have dwindled. “The original idea was equality for founders, but we are a long way from that,” said a former employee.

Another said: “It’s very Coombs dominated. I’ve never worked in a place where the business is so dominated by one person and everyone’s always like, ‘What would Mark think’.”

The person close to Ashmore challenged the argument that Coombs was dominant, citing the investment committee and the board as sources of authority, saying the chief executive is not at the center of every decision.

Coombs also retains significant control, owning 33 percent of the company — though that’s down from nearly 40 percent three years ago. He vowed to reduce his stake to about 30 percent after Institutional Shareholder Services warned in 2018 that he could gain “creeping control.”

Many argue that this makes him a strong match for Ashmore’s shareholders and customers. “He founded it and is the managing director. . . it’s essentially Coombs’ wealth management. His leadership of the company is one of the biggest reasons for the purchase,” said Panmure’s Maile.

Ashmore is known for its lean cost structure – a design designed to help it weather volatile EM cycles – with most staff earning a low base salary for the industry of around £100,000, with a large proportion of compensation coming in the form of Equity is offered. Coombs forgoes a bonus if Ashmore underperforms, which many in the market see as symbolic of this ethos.

What’s next?

With a sizeable cash buffer, no debt, and a commitment to maintaining a generous dividend, Ashmore can afford to wait out the long emerging-market drought.

It has also established local fund management businesses in other markets such as Colombia and Indonesia to help diversify.

Despite the widespread consolidation in the wealth management industry, there’s no indication it might be a takeover target given Coombs’ stake, in which employees own about another 10 percent.

But another trend threatens his active management model: the passive investment industry’s foray into emerging market investing.

“As the universe of debt issued becomes larger, it becomes easier to replicate in an index proxy. If you’re consistently underperforming – or getting caught up in something like being completely on the wrong side of Chinese ownership – I think that’s a tough position,” said the industry veteran.