High markets increase the fortunes of asset managers

The increased pace of earnings growth and solid investor inflows are a welcome change for many U.S. asset managers, although it is considered to provide a temporary recovery from strategic challenges.

For the first time in four years, listed U.S. managers are expected to increase their earnings for a full calendar year. An increase in stock market valuations has boosted managed assets across the industry. BlackRock, for example, reported a record $ 9 billion in AUM at the end of March, up 39% from $ 6.455 billion in the previous twelve months.

Stock prices have widened and advanced well above the broad market during 2021 for the sector, led by Invesco, Ameriprise Financial and Franklin Resources.

“Many asset managers were cheap and considered stocks of value, trading at ebitda at six times,” said Michael Cyprys, an analyst at Morgan Stanley. “The flows and performance of actively managed funds are better and we see an improvement in operating margins and profits.”

“The amount of assets managed by the industry has risen sharply due to market appreciation and retail investors have been chasing the market and putting more money into funds,” said Craig Siegenthaler, an analyst at Credit Suisse. “The stock market cannot continue to grow at this rate, so flows will slow down over the next two quarters.”

Any moderation in flows and turbulent market behavior will once again draw attention to the long-term challenges facing the industry. Intense competitive pressure on commissions and poor performance compared to the relentless increase in products traded on passive exchange has led to endless rounds of industry consolidation.

Invesco acquired Oppenheimer Funds in 2018 and last year Morgan Stanley, to its surprise, bought Eaton Vance, with the aim of expanding its presence and providing more services to customers in one place. The sector is facing cost pressures for investment in technology, to expand to publicly traded funds and private markets.

Marty Flanagan, president and CEO of Invesco, conveyed a sense of caution from the industry, after the $ 1.4 billion asset manager delivered strong first-quarter earnings and long-term net inflows of $ 24.5 billion. dollars last month. “I don’t think the strategic dynamic has changed,” Flanagan said during a profit call with analysts. “Customers expect more from their asset managers and you need a scale in all areas of the organization.”

The registration of offers has been mixed, with cost savings easier to achieve than the exit of funds.

“The best deals are to add a new product or set of customers to your distribution network,” Cyprys said. “In this industry, what matters is the flows, the amount of new money coming in.”

One final wind of the industry is that China has begun approving licenses for Western fund and wealth managers that could transform customer inflows.

However, the direction of the trip remains focused on the funds traded on the stock exchange. After record US $ 503 billion in US ETFs last year, investors have accumulated an additional $ 269 billion in ETFs so far in 2021, according to CFRA. One of the beneficiaries of the ETF boom and widely regarded as an attractive target for a larger asset manager is Wisdom Tree.

“Macroeconomic trends in the loss of investment funds by ETFs and wealth managers towards a model portfolio mean we can benefit and take market share from others,” Jarrett Lilien told the Financial Times. president and chief operating officer of Wisdom Tree. “Our core business is humming and we are expanding,” he said, though he acknowledged that “we are aware that we are attractive”.

The secular headwinds facing the industry explain the wide gap in valuations between asset managers and the broad market. Despite a sharp rise in stock prices, the sector is trading at a still low rate of 13.2 times the estimated earnings per share for the next 12 months and below the broad 22.2 times the S&P 500, according to KBW.

KBW said a robust year of earnings growth for traditional asset managers should result in average earnings growth of close to 20% this year, “slowing to a still healthy 9% in 2022.”

“In the long-term historical context, valuations remain cheap, but given long-term growth concerns, they should be,” said Rob Lee, an analyst at KBW. The strong behavior of the Group of Affiliated Managers, Invesco and Franklin, “emphasizes that investors will respond to signs of improved operating performance,” especially when [asset managers’] “The shares come from low valuations,” Lee said.

However, according to Credit Suisse, a division arises between asset managers, as highlighted by their respective growth rates. Based on net flows and managed assets, the industry’s long-term organic growth rate has recovered since early last year, led by BlackRock and Invesco, but AMG, Franklin Resources and T Rowe Price have lagging behind his teammates.

“Long-term challenges continue and structural pressures on the industry are shifting towards lower rates and flows leaving investment fund vehicles,” Cyprys said.