Since the beginning of the pandemic, the Zacks Investment Management industry has borne the brunt of lower rates. Elevated technology costs keep hurting profitability. While the recent rate hikes are expected to support investment managers’ margin growth, revenues might not improve significantly in the near term.
Investment managers have benefited from higher volatility and client activity amid the pandemic. Although markets began to normalize in second-half 2021, client activity surprisingly remains robust. Hence, BlackRock, Inc. BLK, Blue Owl Capital Inc. OWL, Franklin Resources, Inc. BEN and Affiliated Managers Group, Inc. AMG should benefit from growth in assets under management (AUM).
About the Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals. They earn by charging service fees or commissions. Investment managers are also called asset managers, as they manage hedge funds, mutual funds, private equity, venture capital and other financial investments for third parties. By appointing an investment manager for one’s assets, investors get more diversification options than they would have if they managed their assets by themselves. Investment managers invest their clients’ assets in different asset classes, depending on their needs and risk-taking abilities. Hence, the diversification, which investors get by appointing asset managers for managing their assets, helps reduce the impact of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Consider
Elevated Costs Remain Concerning: The tightening of regulations to increase transparency has led to a rise in compliance costs for investment managers. Also, as wealth managers are constantly trying to upgrade technology to keep up with the evolving customer needs, technology costs are expected to keep rising. These will likely lead to an increase in overall expenses, thus, hurting investment managers’ bottom line.
Higher Rates Likely to Aid Margin Growth Despite Shift in Preferences: Similar to the past few years, the demand for passive investing has been on the rise due to the continued need for low-cost investment strategies. Thus, rising demand for passive investments is expected to hurt investment managers’ margin growth to some extent. Nevertheless, the recent interest rate hikes, along with the expectations of a few more this year, will likely aid margins, which have been under pressure for a long time because of the near-zero interest rate environment. Also, the rise in industry consolidation witnessed since the beginning of 2020 is likely to support bottom-line growth.
Growth in AUM Likely to Continue Despite a Volatile Trend in Asset Flows: In 2020 and the first half of 2021, there was a significant rise in equity market volatility and solid client activity, owing to the coronavirus-induced uncertainty, which aided total AUM growth. In the second half of 2021, markets began to normalize, with client activity remaining decent. Nevertheless, the first half of 2022 witnessed an unexpected rise in volatility and relatively higher client activity, resulting in asset inflows for majority of the industry players. Thus, despite a volatile trend in flows (seen recently), growth in AUM is expected to continue in the near term. Asset managers’ top lines are, therefore, expected to improve, supported by higher performance fees and investment advisory fees, which constitute the majority of their revenues.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 44-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #204, which places it at the bottom 19% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s bottom-line growth potential. The industry’s current-year earnings estimates have been revised 29.2% lower since August 2021-end.
Despite the near-term challenges, we present a few stocks that you may want to keep an eye on. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Investment Management industry has underperformed both the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 7.3%. The S&P 500 composite has rallied 18.7% and the Zacks Finance Sector has appreciated 23.8%.
Two-Year Price Performance
Industry’s Current Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing finance companies because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 4.16X. This compares with the highest level of 5.22X, the lowest level of 2.02X and median of 3.55X over the past five years. Additionally, the industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 10.66X, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a low P/TB ratio, comparing investment managers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TB ratio with that of its broader sector seems more meaningful. When we compare the group’s P/TB ratio with the broader Finance sector, it seems that the group is trading at a marginal discount. The Zacks Finance sector’s trailing 12-month P/TB of 4.49X for the same period is marginally above the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
4 Investment Management Stocks to Keep an Eye On
BlackRock: The New York, NY-based Zacks Rank #3 (Hold) company is the largest asset manager by assets in the United States, with a market capitalization of $105.6 billion. The company’s diversified products, revenue mix and inorganic expansion efforts have been aiding AUM growth. As of Jun 30, 2022, BlackRock had total AUM worth $8.49 trillion.
The company has been continuously strengthening its iShares and exchange-traded funds (ETF) operations. Its efforts to gain market share in the active equity business will likely keep aiding profitability.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In June 2021, it acquired the Climate Change Scenario Model of Baringa Partners. In February, it completed the acquisition of investment management services provider, Aperio Group. Apart from these, over the years, the company has acquired several firms across the globe, thus, expanding its footprint and market share.
Moreover, recently, BlackRock partnered with cryptocurrency exchange, Coinbase Global, to provide its institutional clients with access to digital currencies. Through the partnership, BlackRock’s institutional clients will have access to crypto trading, custody, prime brokerage, and reporting via Coinbase Prime, which is the exchange’s institutional platform, providing a wide range of features and tools.
In the past three months, shares of BlackRock have gained 7.3%. Over the past 30 days, the Zacks Consensus Estimate for the company’s 2022 earnings has been revised 2.9% lower to $33.92 per share, whereas its 2023 earnings estimates have witnessed a downward revision of 3.6% to $37.89.
Price and Consensus: BLK
Blue Owl: Headquartered in New York, NY, Blue Owl is a global alternative asset manager with a market cap of $16.7 billion. Anchored by a strong permanent capital base, it deploys private capital across Direct Lending, GP Capital Solutions and Real Estate strategies on behalf of institutional and private wealth clients.
Blue Owl’s flexible, consultative approach helps position the firm as a partner of choice for businesses seeking capital solutions to support their sustained growth. It was formed through the combination of Owl Rock and Dyal Capital in May 2021.
The company primarily relies on management fees for operating liquidity. As of Jun 30, 2022, it had $119.1 billion in AUM. The company currently carries a Zacks Rank #2 (Buy).
In an effort to further expand its credit capabilities, this April, OWL completed the acquisition of Wellfleet Credit Partners LLC from affiliates of Littlejohn & Co, LLC. In December 2021, it acquired Oak Street Real Estate Capital, LLC, and its investment advisory business, along with Ascentium Group Limited. Supported by a solid balance sheet, OWL remains well-positioned for opportunistic acquisitions, which will likely aid its top-line growth.
OWL’s shares have gained 1.1% over the past three months. Over the past 30 days, the Zacks Consensus Estimate for its 2022 earnings has been revised upward by 23.1% to 64 cents per share. Likewise, earnings estimates for 2023 have been revised upward by 35.8% to 91 cents.
Price and Consensus: OWL
Franklin Resources: Based in San Mateo, CA, Franklin Resources is a global investment management company, with a market cap of $13.5 billion. Its operating revenues and net income are derived from offering investment management and related services to retail mutual funds, institutional and private accounts, and other investment products.
Franklin Resources operates with Sep 30 as its fiscal-year end. As of Jun 30, 2022, the Zacks Rank #3 company had an AUM of $1.37 trillion. It has a strong distribution platform that increased the diversification in flows across funds, vehicles and asset classes, as well as key business growth. Moreover, the company has been an early entrant in many foreign markets, enjoying a first-mover advantage. It tries to attract, develop and retain employees, as well as invest tactically in systems and technology, which provide a secure and stable environment.
The company has been engaged in inorganic expansion efforts, which have enhanced its foothold. This May, it entered an agreement to acquire BNY Alcentra, one of the largest European alternative credit managers. In April 2022, Franklin Resources completed the acquisition of Lexington, which boosted its alternative asset offerings. On Dec 31, 2021, it closed the acquisition of OSAM, which will further enhance its presence in the separately managed account space. BEN also concluded the all-cash acquisition of Legg Mason in July 2020. The strategic and financial benefits from the acquisition exceeded the firm’s targets, and augmented its growth opportunities.
These, along with several other past acquisitions, will support the company in improving and expanding its alternative investments and multi-asset solutions platforms.
Over the past three months, shares of the company have lost 0.5%. Over the past 30 days, the Zacks Consensus Estimate for its current fiscal year and next fiscal year’s earnings has been revised upward by 4.3% and 6.9%, respectively, to $3.60 and $3.11 per share.
Price and Consensus: BEN
Affiliated Managers: Headquartered in Massachusetts, Affiliated Managers has equity investments in a large group of investment management firms or affiliates. The affiliates manage more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, and alternative and fixed-income products. The company has a market cap of $5.1 billion.
As of Jun 30, 2022, this Zacks Rank #3 company had total AUM of $690.9 billion. It is expected to continue generating meaningful growth through new investments. Its successful partnerships and focus on strengthening the retail market operations will likely keep aiding profits. The acquisitions of the majority stakes in Parnassus Investments and Abacus Capital Group, along with the buyouts of minority stakes in OCP Asia, Boston Common Asset Management and Systematica, are steps in this direction.
Notably, this March, AMG announced an agreement to sell its minority interest in Baring Private Equity Asia to EQT AB, wherein the company will receive total consideration of $1.1 billion, including $240 million in cash and 28.68 million of EQT ordinary shares.
While Affiliated Managers’ affiliates have been witnessing overall net outflows over the past few years, the company’s differentiated product categories are likely to support cash flows across channels.
AMG has appreciated 0.5% over the past three months. The Zacks Consensus Estimate for its 2022 earnings has been revised upward by 3.4% to $18.59 per share over the past 30 days. Likewise, earnings estimates for 2023 have been revised upward by 1.1% to $19.40.
Price and Consensus: AMG
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