Guinness Global Money Managers Fund Guinness Global Money Managers Fund A high conviction equity fund managed by Will Riley and Tim Guinness investing in quoted companies in the asset management sector. INVESTMENT COMMENTARY – January 2020 Aim Asset management sector The Fund aims to deliver long‐term capital In this month’s update, we review the asset management growth by capturing the strong returns that sector and our Fund performance in 2019, and consider successful asset management companies can deliver to shareholders. the outlook for 2020 and beyond. We expect asset managers to outperform the Performance in 2019 broad market over the long term, primarily due to the ability of successful managers to grow their Total return % (in USD) 2019 earnings more rapidly than the broad market. Guinness Global Money Managers Fund 32.1 MSCI World (net return) 27.7 MSCI World Financials Index (net return) 25.5 Performance 31.12.2019 IA Global Equity sector 23.4 150% IA Global Financials sector 21.6 Guinness Global Money Managers 130% IA Global sector Source: Bloomberg, Financial Express 110% FE Offshore financials funds The Global Money Managers Fund (class E, in USD) in 2019 90% produced a total return of +32.1%. This compares to the return of the MSCI World Index (net return) of +27.7% and 70% the MSCI World Financials Index of +25.5%. 50% After a period of weak performance in 2018, the money 30% management sector rebounded well in 2019. Strength 10% across asset classes, particularly equities, acted as a major Cumulative total return from Fund launch support, since nearly all participants are operationally ‐10% (31.12.10), in GBP geared to rises and falls in the market. ‐30% 2011 2012 2013 2014 2015 2016 2017 2018 2019 With the exception of wealth managers, all subsectors within the money management industry performed very strongly in 2019. As a group, alternative asset managers Index MSCI World Index were the runaway winners, benefitting from record net Financials Index MSCI World Financials Index inflows, whilst defending fees and margins more Fund launch 31.12.10 successfully than public equity and fixed income oriented managers. Mid and smaller cap traditional asset managers Past performance should not be taken as an generally enjoyed better flows than their large cap peers, indicator of future performance. The value of this investment and any income arising the latter group suffering more from active‐to‐passive from it can fall as well as rise as a result of rotation. That said, rising markets caused the average market and currency fluctuations. manager in all three groups to increase AuM over the Source: Financial Express (X class, 1.24% OCF), bid year. In general, and in common with the last five years, to bid, total return. we observed that some active providers reacted to the threat from passive products better than others, distributing products that were clearly differentiated from passive products, or that were sufficiently competitively priced. 2015: BEST FUND OVER 3 YEARS EQUITY SECTOR BANKS & OTHER FINANCIALS Tel: +44 (0) 20 7222 5703 Guinness Asset Management Ltd Email: [email protected] is authorised and regulated by the Financial Conduct Authority Web: guinnessfunds.com Guinness Global Money Managers Fund The best performers in the fund over the year (on a total return basis) were: Azimut (+139.2%), Liontrust Asset Management (+103.7%) and Blackstone (+96.3%). Azimut was significantly oversold at the end of 2018, caught up in the general sell‐off of Italian equities, and enjoyed a healthy bounce throughout 2019. The company remains the leading independent asset manager in Italy. AuM growth accelerated in 2019 thanks to positive market movements and net inflows of over EUR4bn (taking total AuM to c.EUR58bn). Azimut’s five year growth plan sees them focusing on expanding the equities portion of their business, and their presence in private markets and alternatives. Liontrust, which we purchased for the fund in 2012, continues to enjoy a transformational period. 2018 saw impressive net inflows and the acquisition of the Sustainable Investment Team from Alliance Trust, and last year the company built on that success. AuM reached £17.9bn in the middle of November 2019, up from £12.7bn at the end of March. Overall, Liontrust has achieved one the highest rates of organic inflows in the industry. At the start of October, the company also completed the acquisition of Neptune Investment Management, adding a further £2.7bn of AuM. In the alternatives sector, Blackstone was our strongest performer. The company is likely to end 2019 with well over $100bn of new funds, led by good inflows into flagship funds and new initiatives. One of Blackstone’s growing successes is in its perpetual capital funds. The majority of this growth comes in the company’s real estate strategies, which now comprise around $42bn of Blackstone’s $97bn total perpetual capital. Other successes included good flows into the company’s flagship European Fund (BREP Europe VI), plus new initiatives in infrastructure and insurance. With cashflow estimates for the company improving, Blackstone raised their share buyback authorization during the year. The worst performers in 2019 were: GAM Holding (‐26.0%), Affiliated Managers Group (‐11.8%) and Value Partners (‐10.2%). Fallout from the liquidation of GAM’s absolute return bond funds continued in 2019, with the company attempting to restructure. Late in the year, the company announced senior management departures, with the Head of Investments and Head of Operations both leaving the business. GAM also suffered from the news in December that the Swiss stock exchange was seeking sanction against the company over its accounting treatment of financial liabilities in relation to the acquisition of Cantab Capital Partners in 2016. The company responded, assuring of no cashflow impact from the treatment. We sit nursing our losses with this investment after a torrid 2018, but importantly, underlying investment performance at the company remains strong, with the majority of assets under management ranking first or second quartile over the last three years. Hong Kong based asset manager Value Partners faced various challenges in 2019. The stock suffered due to the downturn in sentiment towards Hong Kong’s market, amidst unrest between locals and Chinese authorities. The company also saw personnel changes, with the departure of its head of sales particularly unsettling the market. And importantly for profitability, performance fees generated were well down, with key funds remaining below their high watermark levels. Value Partner’s AuM ended 2019 flat at US$15bn, with rising markets being offset by net outflows of US$1.7bn. Affiliated Managers Group saw net outflows of 1.5% of AuM in 2018, and this is expected to have accelerated in 2019 to around 2.5% of AuM. A number of AMG’s key investee companies had funds trading averagely versus peer groups, which has been enough in some cases (e.g. AQR) to turn steady net inflows into outflows. Against this, the company trades on one of the lowest 2019 P/E ratios in our portfolio, at 6.1x 2020 earnings. Past performance should not be taken as an indicator of future performance. The value of investments and any income arising from them can fall as well as rise. January 2020 guinnessfunds.com 2 Guinness Global Money Managers Fund Within the asset management sector, data for US mutual fund flows (which we treat as a proxy for global flows) indicated record outflows from active equity funds in 2019, surpassing the outflows seen in 2018. The picture for active bond & income funds was better, with strong positive flows in every quarter. Source: ICI; Bloomberg; Guinness Asset Management Data from the US ETF industry shows a contrasting picture, with inflows across equity ETFs, bond & income ETFs and hybrid ETFs in every quarter since the start of 2017: Source: ICI; Guinness Asset Management Outlook The assets under management of many companies in our investment universe reached new highs in 2019, helped by the bull market in global equities and also the secular forces of wealth creation, expansion in the breadth of investible assets, and demographic shifts. It was an environment where many firms achieved record profits. And yet, 2019 was also a year when the pressures of active to passive rotation in equities, associated fee pressures, plus the burden of increased regulation, were as visible as any point in the last decade. Past performance should not be taken as an indicator of future performance. The value of investments and any income arising from them can fall as well as rise. January 2020 guinnessfunds.com 3 Guinness Global Money Managers Fund Global assets under management vs MSCI World Index (total return) 1990‐2019 Source: City UK; McKinsey; Guinness Asset Management So, how do these countervailing trends play out in the 2020s? We continue to believe that the money management sector is developing into the ‘haves’ and the ‘have‐nots’. Simplistically, it would be easy to think of the ‘haves’ as those who can crack the issue of scale: ‘trillionaire’ firms managing the largest pool of assets in an efficient, profitable fashion. This is part of the answer. As we see it, however, quality remains the key facet when defining a successful asset manager, and manifests itself in various ways, not just via scale. We define quality as “the ability of a manager to consistently meet stated and relevant objectives”. For a smaller traditional asset manager, it likely means the provision of high active share, alpha‐generating portfolios. For a passive provider, quality increasingly looks like the delivery of easily accessible, very low tracking‐error, low cost ETF products. For an alternatives provider it is the consistent delivery of differentiated absolute returns.