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* H1 pretax profit down 7 percent to 120 mln pounds
* Shares down 1.2 percent
By Laurence Fletcher
LONDON, Feb 21 (Reuters) - Emerging markets fund manager Ashmore Group posted a 7 percent fall in first-half profit, driven by lower returns from funds and a shift by clients towards portfolios that do not charge performance fees.
While Ashmore has been winning clients, it is seeing margins drop as it attracts institutional investors, such as insurers, who tend to pay lower fees than retail clients.
These institutional investors mostly buy products such as investment grade debt funds which have lower margins and are less likely to command performance fees than high-yield funds.
Ashmore, founded by Mark Coombs in the late 1990s, said on Thursday pretax profit for the six months to end-December was 120 million pounds ($184 million).
"We continue to believe that emerging markets is a structural long-term growth theme. But we also note that Ashmore has the short-term challenge of declining fee yields and an eroding EBITDA (core earnings) margin," said Numis analyst David McCann, who has an 'add' rating on the stock.
"Therefore, future actual earnings growth may be much lower than the AuM (assets under management) growth opportunity suggests," he said.
Ashmore stock was down 1.2 percent at 360 pence at 1010 GMT.
Finance director Graeme Dell told Reuters that fewer funds had hit their hurdle rates, above which Ashmore can charge performance fees, because absolute returns from emerging markets have been lower recently than in the rebound following the credit crisis.
Performance fees fell a third to 15.3 million pounds, driven by falling fees from its external and local currency debt funds. Revenue margins fell to 0.69 percent from 0.76 percent.
Dell said there was "still opportunity for further spread narrowing" in emerging market sovereign bonds, despite a drop in spreads from 426 basis points to 271 basis points over the course of last year.
"Equities are still well priced (relatively cheap). There is opportunity for good appreciation there," Dell said.
Emerging market shares rallied more than 15 percent last year - including more than 5 percent in the fourth quarter - as signs China's economy would not slow too quickly and an easing of euro zone debt crisis supported prices.
Ashmore's assets under management rose 11 percent during the six months to $71 billion, boosted by investment gains as markets rallied and by client inflows.