A rising tide of earnings growth and robust investor inflows are a welcome change for many US asset managers, although it is seen as providing a temporary reprieve from strategic challenges.
For the first time in four years, listed US managers are forecast to increase their earnings over a full calendar year. A surge in stock market valuations has buoyed assets under management across the industry. BlackRock, for example, reported a record $9tn in AUM at the end of March, a rise of 39 per cent from $6.45bn over the preceding 12 months.
Share prices have zoomed and run well ahead of the broad market during 2021 for the sector, led by Invesco, Ameriprise Financial and Franklin Resources.
“Many asset managers were cheap and deemed value stocks, trading at six times ebitda,” said Michael Cyprys, analyst at Morgan Stanley. “Flows and performance of actively managed funds is better and we are seeing an improvement in operating margins and earnings.”
“The amount of assets managed by the industry has gone up a lot due to market appreciation and retail investors have been chasing the market and putting more money into funds,” said Craig Siegenthaler, analyst at Credit Suisse. “The stock market can’t keep rallying at this pace, so flows will slow during the next couple of quarters.”
Any moderation in flows and choppy market performance will shift attention back to the long-term challenges facing the industry. Intense competitive pressure on fees and poor performance versus the relentless rise of passive exchange traded products has spurred endless rounds of industry consolidation.
Invesco acquired Oppenheimer Funds in 2018 and last year Morgan Stanley, in a surprise swoop, bought Eaton Vance, with the focus on bulking up its presence and providing more services to clients in one place. The sector faces cost pressures from investing in technology, expanding into exchange traded funds and private markets.
A sense of industry wariness was conveyed by Marty Flanagan, president and chief executive of Invesco, after the $1.4bn asset manager delivered strong first-quarter earnings and net long-term inflows of $24.5bn last month. “I don’t think the strategic dynamic has changed,” said Flanagan during an earnings call with analysts. “Clients expect more from their asset managers and you need scale across all areas of the organisation.”
The record on deals has been mixed, with cost savings easier to achieve than stemming outflows from funds.
“The better deals involve adding a new product or a customer set for your distribution network,” said Cyprys. “In this industry what matters is flows, the amount of new money coming in.”
One tailwind for the industry is that China has begun approving licences for western wealth and fund managers which could transform client inflows.
Yet the direction of travel remains focused on exchange traded funds. After record inflows of $503bn into US ETFs last year, investors have pumped a further $269bn into ETFs so far in 2021, according to CFRA. One beneficiary of the ETF boom and widely viewed as being an attractive target for a larger asset manager is Wisdom Tree.
“The macro trends of mutual funds losing out to ETFs and wealth managers moving towards model portfolios means we can benefit and take market share from others,” Jarrett Lilien, president and chief operating officer of Wisdom Tree told the Financial Times. “Our core business is humming and we are expanding,” he said, while he acknowledged “we are mindful that we are attractive”.
The secular headwinds facing the industry explain the wide gap in valuations between asset managers and the broad market. In spite of a strong rally in share prices, the sector trades at a still low 13.2 times the earnings-per-share estimate for the next 12 months, and below the broad S&P 500’s 22.2 times, according to KBW.
KBW said a robust year of earnings growth for traditional asset managers should result in average earnings growth near 20 per cent this year, “slowing to a still healthy 9 per cent in 2022”.
“In long-term historical context, valuations remain inexpensive, but given long-term growth concerns they should be,” said Rob Lee, analyst at KBW. The strong performance of Affiliated Managers Group, Invesco and Franklin, “highlights that investors will respond to signs of improved operating performance” especially when [asset managers’] “stocks are coming off low valuations”, said Lee.
However, a divide among asset managers is emerging as highlighted by their respective growth rates, according to Credit Suisse. Based on net flows and assets under management, the industry’s long-term organic growth rate has recovered from the start of last year led by BlackRock and Invesco but AMG, Franklin Resources and T Rowe Price have lagged behind their peers.
“The long-term challenges remain and structural pressures on the industry are the shift to lower fees and flows leaving mutual fund vehicles,” said Cyprys.