The MSCI emerging market index declined almost 6 per cent in the three-month period and with investors taking cover, this led to a $193m (£128m) capital outflow from Charlemagne's funds. AUM declined from $2.59bn to $2.25bn in the fourth quarter.
This was the second successive year of outflows in excess of $25bn from the emerging markets arena. So although Charlemagne's net management fees were actually up 8 per cent over the 12-month period to £25.8m, net performance fees were decimated and, at £2.4m, were well below the £16.2m earned in 2013. The net effect is that analyst Andrew Watson at brokerage N+1 Singer now expects Charlemagne to report revenues down 31 per cent to £28.5m for fiscal 2014 which translates into a two thirds decline in pre-tax profits and EPS to £3.1m and 0.5 cents, respectively.
Positives
There are positives though. Firstly, given the company has net cash and liquid investments of $24m, or the equivalent of 5.5p a share - the board will pay a second uncovered interim dividend of 0.5 cents to make a total of 1 cent for the reporting period. On this basis, the dividend yield is 6.3 per cent.
Secondly, the company has announced what is a transformational agreement with US marketing adviser North Bridge Capital to help Charlemagne build a presence in the US institutional investment market. Of Charlemagne's strategies, its core emerging markets, Latin American and its specialist Magna Middle East and North American funds all outperformed last year. Moreover, until last year, its long-short OCCO fund, accounting for 23 per cent of the latest AUM and which has previously generated the majority of the performance fees, had enjoyed a solid long-term track record. Between 2002 and 2013 the fund had provided investors with a compound annual growth rate of over 10 per cent.
As part of the agreement, North Bridge has been granted options over 1 per cent of Charlemagne's issued share capital, subject to $100m of AUM being raised under the agreement. Subsequent options may be granted up to a maximum of 9.9 per cent of the company's share capital provided $2bn of AUM has been raised.
Uncertain outlook
True, the outlook is far from certain and the recovery in the emerging market space which I had anticipated when I recommended buying the shares at 16p in my 2014 Bargain share portfolio clearly failed to materialise. But the outperformance of the company's core long-only funds, which actually enjoyed net inflows last year, highlights the ability of Charlemagne's asset managers. Moreover, the collapse of the Eastern European markets - the MSCI Eastern European Index declined 26.8 per cent in the fourth quarter of 2014 - combined with the collapse in the oil price (down by 42 per cent in the three-month period) are extreme one-off events, which has led to heightened investor risk aversion.
In the circumstances, I do feel that N+1 Singer's estimates for 2015 are not pie in the sky: Mr Watson is predicting revenues of $33m, pre-tax profits of $7.6m, EPS of 1 cent and a maintained dividend of 1 cent. That's because a chunk of the redemptions last year were low margin institutional mandates and if the North Bridge agreement attracts the new funds that Charlemagne is anticipating then this could increase management fees sharply.
It goes without saying that after four years of underperformance by emerging markets in general, then Charlemagne's portfolio of funds are well placed to capture investment flows in the event of a recovery. It's worth noting, too, that N+1 Singer's estimates only factor in an underlying investment performance of 4 per cent on Charlemagne's portfolios apart from its long-short OCCO fund where it has an assumption of a higher 6 per cent investment return. That's still below the 1 per cent monthly target of the fund and a deep discount to the 12-year average performance of 10 per cent.
One off events
It's also fair to say that the collapse in the oil price - Brent crude has fallen from $115 a barrel in June to $45 a barrel - is nearer to its end than its beginning, given we are at the point where projects are being mothballed. The supply side will adjust to the change in demand as it always does.
Indeed, analyst Lauri Hälikkä at Nordic investment bank SEB, points out this morning that "if we assume that the world's crude oil production stands at about 70m barrels a day, then a crude oil price at $40 a barrel would lead to a cut in daily production of about 1.1m barrels, which may be in the ballpark needed to balance the market." This estimate is backed up by analysts at Wood Mackenzie - the global energy, metals and mining research and consultancy group - who believe the $40 price level is where supply will start to decrease. Of course, markets have a habit of overshooting, but in my view the vast majority of the oil price decline is now in the past, albeit the recovery when it comes could be a protracted affair. Still, a stabilisation of the oil price will clearly be a positive for the battered emerging markets.
Valuation
Ultimately, it comes down to valuation. With more than 50 per cent of Charlemagne's market capitalisation of £30m backed by cash and liquid assets, then the market is only ascribing a value of £14m to its fund management business. This operation still produced depressed pre-tax profits of around £2m in what was a tough year for emerging market funds. That valuation also implies no recovery potential at all. So although the investment has not worked out as I had planned, I would continue to hold the high yielding shares for recovery at the depressed price of 10.5p.
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
