In the second half of 2013, Charlemagne's assets under management (AUM) rose by $128m, reversing a first half outflow of $80m which, combined with a seven per cent plus investment performance, resulted in a year-end total AUM of $2.73bn (£1.65bn), up almost 13 per cent since the end of June.
This meant that total revenue increased by a third to $41.3m in the 12 month period, roughly split 60:40 between management and performance fees. Importantly, six out of Charlemagne’s nine Magna funds achieved first quartile performance in their market segments in 2013 which in turn attracted net flows of $193m into these funds. Chief executive Jayne Sutcliffe points out that the company’s Global Emerging Markets, Eastern European and Frontier strategies enjoyed notable inflows. She also notes that there were net fund inflows into all categories in the final three months of last year, and over the year in total. That was quite an achievement considering the industry saw a net fund outflow in 2013.
On macro level, the investment theme last year was primarily about stock picking in emerging markets, a trend that is set to continue in the absence of a strong rally in risk assets. That seems a reasonable assumption to make given investors are still concerned that a tapering of the US Federal Reserve's bond buying programmes will ultimately lead to withdrawals from fixed income markets, and a reversal of the hot money flows that made their way into some emerging markets economies while the US central bank was running its quantitative easing operations.
That said, investors have become more discerning in distinguishing between good and bad companies, and higher quality businesses - those that create consistent value for shareholders - continue to command a premium valuation. That should be good news for Charlemagne’s investment strategies to maintain their outperformance and continue to attract further inflows.
For instance, the asset manager’s long-short OCCO fund, accounting for around a quarter of AUM, generated the vast majority of the $16.2m performance fees earned by the company last year. Emerging market investors in Charlemagne’s funds will also have noted too that its emerging market equity income and growth strategies have achieved top decile performance over one and three years in its Morningstar peer group, and eight out of nine of the Magna sub funds performed better than their respective median fund last year. That is not only good news for fund retention, but also for attracting new funds flows. It’s also rather good news for both earnings and dividends.
Strong earnings and dividend growth
Reflecting the sharp increase in revenues, Charlemagne’s operating profit surged by 90 per cent to $9.5m last year to produce EPS of 1.4c and supported the payment of a second interim dividend of 1c, or 0.6p a share. That payout will be made at the end of next month (ex-dividend date of 26 March) and brings the total payout to 1.5c, or 0.9p a share. True, the uncertain macro backdrop has led to some analysts reining back their growth assumptions this year to around 10 per cent growth in AUM and a 5 per cent return on opening AUM, so that the respective forecasts from broking house N+1 Singer are for revenues of $42.6m, operating profits of $11.3m and EPS of 1.7c, or 1.03p. But if Charlemagne continues to attract funds flows, as seems realistic at this stage even after factoring in developments in Russia and Ukraine, which have clouded the macro backdrop and led to higher risk aversion, then there is scope for earnings growth to beat these estimates.
In any case, analysts still expect the dividend to be raised yet again this year, to around 1.7c a share, reflecting the board's policy of paying out all net earnings to shareholders. This means that the shares are currently offering an attractive prospective yield of 5.5 per cent. It could clearly be more if EPS beats estimates.
It's also worth considering that Charlemagne’s net funds ended last year at $25.4m, or £15.4m. This equates to 5.3p a share. Strip this sum out from the current share price of 19.75p, and the cash adjusted PE ratio is only 13 for 2014, a rating that seems harsh for an asset manager that is now attracting fund inflows once again. A share buy-back programme is also supportive of the investment case given the company can shrink its issued share capital by recycling low yielding cash by repurchasing its shares to boost EPS. Also, net of cash the company’s equity is only being valued at 1.8 per cent of AUM. That doesn’t seem an exacting valuation to me and is a very modest rating relative to peers.
It’s worth pointing out that analysts remain positive on the shares. Andrew Watson at brokerage N+1 Singer points out that: “The valuation leaves room for upside as we look to the coming quarters for a continuation of the strong net inflows seen in the second half of 2013. We think that above average fund performance, strong prospective earnings growth and the dividend provide attractions at this stage.”
I concur with that view and continue to rate the high yielding shares a decent income buy on a bid-offer spread of 18.5p to 18.75p, and one where any recovery in emerging markets is in effect in the price for free.
Please note that I have published another column today: Time to make a bolt-on acquisition. I am still working my way through a large number of announcements from companies on my watchlist. These include: LMS Capital (LMS), BP Marsh Partners (BPM), Eros (NYSE: EROS), First Property (FPO), Trading Emissions (TRE), Polo Resources (POL) and Cairn Energy (CNE). My next column will appear tomorrow morning.
