Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

There's light at the end, but how long's the tunnel? Emerging market specialist fund managers are asking investors to show an awful lot of patience as they wait for a turnaround.

Ashmore this week said pretax profit fell 43 percent in the six months to December from a year earlier. Net revenue was down 24 percent. Assets under management fell 16 percent.

Money's Too Tight
Bloomberg data

Unsurprisingly, its stock is taking a beating. It's down about a third in the past year. There's a similar story at emerging market rival, Aberdeen, whose share price has halved.

The catalyst, of course, is that investors are stressing out over the collapse in commodity prices, China's slowing growth and the shift in Fed interest rate policy. So they’re pulling money from emerging market funds, squeezing fees for managers.

The outlook on all of these problems remains grim. If anything, 2016 has started in even worse shape than 2015 ended.

In fairness, emerging market specialists aren't the only ones hurting. Market turmoil is buffeting a slew of fund managers. Schroders shares are down 21 percent in 2016, for instance. Jupiter has lost about 20 percent. Henderson is down 26 percent, even though assets under management hit a record 92 billion pounds ($132.6 billion) in December. Henderson said Thursday it would scale back discretionary spending -- investment in IT or marketing, for instance -- if the market slide continues.

Flow Down
Assets parked with emerging market fund managers are falling, while those at some of their peers are on the rise
Sources: Henderson, Ashmore

But what's the argument for sticking with emerging market managers at all? More than 70 percent of equity analysts following Ashmore have either a buy or a hold recommendation on the stock, according to Bloomberg data. Here's Numis analyst David McCann, who rates Ashmore a "Buy," in a note: "We believe EM assets will eventually recover (no idea when though)." Indeed.

Short-sellers have taken a dimmer view, with their interest standing at almost 12 percent of Ashmore's outstanding shares, according to data from Markit -- making it the most shorted financial services stock in the FTSE 250.

In its defense, Ashmore did generate about 56.9 million pounds in cash from operations in the six months to December. It's debt-free. And it has a good record of reducing costs when times are tough, largely because much of its compensation is variable. Operating costs fell 16 percent to 46.3 million pounds.

But keeping up that level of cost-cutting can't go on forever. As total costs shrink, the variable piece that management can work with gets proportionately smaller. Also, cut back too far on compensation and staff will head for the exits.

For now, though, Ashmore's cost control helps it maintain a steady dividend. Investors who stay with Ashmore get a yield of 8.3 percent, Bloomberg data show. At Aberdeen, it's 9.3 percent. At peers focused on developed markets, the dividend yield is about half these levels.

Emerging Split
Dividend yields at UK-listed asset managers that focus on emerging markets are outstripping their peers
Bloomberg

Still, while hefty yields are some reward for patient investors, it's hard to get away from the notion that the decision whether to buy into an emerging market manager right now depends on your pain threshold and your timeline. 

It's highly likely emerging markets will one day look attractive again. Ashmore's CEO Mark Coombs notes that the IMF expects emerging market economic growth to accelerate in 2016, from 4 percent to 4.3 percent, twice the rate for developed markets. Financial markets though are pricing in a great deal more uncertainty. Who can put a timeline on the turnaround in investor sentiment? Not even the emerging market specialists would try to do that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net