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By Nishant Kumar
LONDON (Reuters) - Fund manager Ashmore Group Plc (L:ASHM) has posted a sharp drop in profit for the past year after being hit by turbulence in the emerging markets in which it specialises, sending its shares to a six-month low.
The result highlights challenges faced by Ashmore, whose assets tripled in recent years on the back of rising investor interest in emerging markets but which remains vulnerable to market swings in such economies at a time when the prospect of interest rate hikes is rising.
The company's pretax profit fell 34 percent to 170.3 million pounds ($276.3 million), it said on Thursday, about 5 percent lower than the mean forecast by analysts tracked by Thomson Reuters StarMine.
About 30 million pounds of the decrease at the pretax level was due to lower performance fees, due to a drop in the value of the funds it manages as well as how well they performed. Another 46 million of the decline was a result of the strength of sterling against the dollar, reflecting the fact that it earns most of its fees in the U.S. currency.
Assets under management (AUM) fell 3 percent to $75 billion (46.20 billion pounds) through the year to the end of June after the group suffered net outflows worth $7.5 billion. However, it added about $5 billion of assets in the last quarter.
The group's net management fee margin fell to 60 basis points at the end of June from 68 during the same period last year, continuing its slide from more than 100 basis points five years ago.
"Because of that quite hefty margin compression, it's very difficult for this group to show any profit growth," said David Mccann, an analyst at brokerage Numis Securities.
With inflationary pressure and other costs, Ashmore needs to keep increasing net inflows by 10 percent just to keep earnings steady, he said. "That's a pretty hefty hurdle."
Ashmore shares traded down 6.6 percent at 0915 GMT (10:15 a.m. BST), the biggest declining financial sector stock within the FTSE All Share Index <.FTSA>. The stock fell as low as 320p, its lowest since late March.
MORE VOLATILE
The group has sought to benefit from emerging market volatility, but the same conditions can also result in a short-term underperformance, Chief Executive Mark Coombs said in a statement. More recently there had been more positive signs.
"The recovery in sentiment towards emerging markets in recent months has benefited positions taken during those more volatile periods over the course of the year," he said.
About 80 percent of the firm's assets outperformed benchmarks over a three-year period, while 92 did so over five years, the company said, referring to a critical measure used by investors when they allocate money to a fund.
Ashmore said it had cut total operating costs by 23 percent to 97.9 million pounds and proposed to pay a final dividend of 12 pence per share, giving a 2 percent increase for the full-year dividend to 16.45 pence.
Going into the results, Ashmore shares traded at 15.1 times 12-months forward earnings estimates, about 8 percent above a five-year median figure, Thomson Reuters StarMine data showed.
Of 17 analysts tracking the company, three rated it a "buy" or a "strong buy", a drop from six three months ago.
"Between falling management margins (even without considering performance fees) and markets continuing to be less-than-helpful, even with (the dollar's) ... recent resurgence against sterling, the premium rating Ashmore already enjoys appears full to us," Alex Potter, an analyst at Mirabaud Securities, wrote in a report.
(Editing by Jane Merriman and David Holmes)