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3 Investment Management Stocks to Gain From AUM Growth, Inflows
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The Zacks Investment Management industry has benefited from the rise in equity market volatility and higher client activity amid the coronavirus outbreak in 2020 and the first few months of this year. While there has been continued uncertainty since the Omicron variant’s emergence, markets have begun normalizing. Client activity remains decent, resulting in overall asset inflows.
While lower interest rates and elevated technology-upgrade-related expenses might hamper profitability, investment managers’ revenues are likely to grow on rising assets under management (AUM) balances. Thus, industry players like BlackRock, Inc. (BLK - Free Report) , Franklin Resources, Inc. (BEN - Free Report) and Affiliated Managers Group, Inc. (AMG - Free Report) should gain.
About the Industry
The Zacks Investment Management industry consists of firms that manage securities and funds for clients to meet specified investment goals. These companies 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 Keep an Eye on
Net Inflows to Continue to Aid AUM Growth: In 2020 and the first couple of months 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. While markets began to normalize from the second quarter of this year, overall client activity has remained decent. Moreover, while some industry players have been witnessing asset outflows, the majority have seen inflows in the past few months on growing investor optimism regarding the economic recovery. Thus, driven by rising inflows, growth in AUM is expected to continue in the near term. Asset managers’ top line is thus expected to improve, supported by higher performance fees and investment advisory fees, which constitute the majority of their revenues.
Shift in Preferences, Relatively Low Interest Rates Likely to Keep Margins Under Pressure: Given the continued need for low-cost investment strategies, the demand for passive investing is expected to increase, similar to the past few years. Because of this, margins of asset managers might remain under pressure. The near-zero interest-rate environment has also been hurting margin growth to an extent since the past few quarters. While the Federal Reserve has signaled as many as three rate hikes next year, relatively lower rates might keep margins under pressure. Yet, the rise in industry consolidation witnessed since the beginning of 2020 amid the pandemic is likely to offer some support to investment managers’ profits.
Rising Technology Costs are 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 rise. These will likely lead to an increase in overall expenses.
Zacks Industry Rank Indicates Bright 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 #47, which places it at the top 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 outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of bright earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have confidence in this group’s bottom-line growth potential. The industry’s current-year earnings estimates have been revised 20.7% upward since December 2020-end.
Before we present a few investment management stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector but Underperforms the S&P 500
While the Zacks Investment Management industry has underperformed the S&P 500 composite, it has outperformed its sector over the past two years.
Stocks in the industry have collectively gained 30.4% in the past two years, outperforming the Zacks Finance sector’s rally of 16.4%. However, the S&P 500 composite has grown 47.1% over the same period.
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 3.55X. This compares with the highest level of 4.14X, the lowest level of 2.01X and median of 3.48X over the past five years. Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 17.37X, 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 decent discount. The Zacks Finance sector’s trailing 12-month P/TB of 4.43X for the same period is above the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 Investment Management Stocks Worth Betting On
BlackRock: This New York, NY-based Zacks Rank #2 (Buy) company is the largest asset manager by assets in the United States with a market capitalization of $136.3 billion. The company’s diversified products, revenue mix and inorganic expansion efforts have been aiding AUM growth. As of Sep 30, 2021, BlackRock had total AUM worth $9.46 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 July 2021, it agreed to make a minority investment in SpiderRock Advisors, while in June, 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.
In the past year, shares of BlackRock have gained 29.4%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2021 and 2022 earnings has been revised marginally upward to $38.93 and $42.39 per share, respectively.
Price and Consensus: BLK
Franklin Resources: Based in San Mateo, CA, Franklin Resources is a global investment management company with a market cap of $16.2 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 Sep 30, 2021, the Zacks Rank #1 (Strong Buy) company had AUM of $1.5 trillion. It has a strong distribution platform that has increased diversification inflows across funds, vehicles and asset classes as well as key businesses growth. Moreover, the company has been an early entrant in many foreign markets, enjoying a first-mover advantage. It tries to attract, retain and develop employees as well as invest tactically in systems and technology, which provides a secure and stable environment.
The company has been engaged in inorganic expansion efforts, which have enhanced its foothold. This November, in a bid to bulk up its offerings in the alternative investment space, Franklin Resources inked an agreement to acquire Lexington Partners. In October, it announced the acquisition of O’Shaughnessy Asset Management, LLC. Franklin Resources 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.
Over the past year, shares of the company have gained 30.9%. Over the past 60 days, the Zacks Consensus Estimate for its current fiscal year and next fiscal year earnings has been revised upward by 6.9% and 9.2%, respectively, to $3.55 and $3.79 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, alternative and fixed-income products. The company has a market cap of $6.3 billion.
As of Sep 30, 2021, this Zacks Rank #2 company had total AUM of $747.8 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 acquisition of a majority stake in Parnassus Investments along with the buyouts of minority stakes in OCP Asia and Boston Common Asset Management are steps in this direction.
Affiliated Managers’ stock has gained 55.3% over the past 12 months. The Zacks Consensus Estimate for its 2021 earnings has been raised by 5.5% over the past 60 days to $18.11 per share. Likewise, earnings estimates for 2022 have been revised upward by 5% to $20.92.
Price and Consensus: AMG
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3 Investment Management Stocks to Gain From AUM Growth, Inflows
The Zacks Investment Management industry has benefited from the rise in equity market volatility and higher client activity amid the coronavirus outbreak in 2020 and the first few months of this year. While there has been continued uncertainty since the Omicron variant’s emergence, markets have begun normalizing. Client activity remains decent, resulting in overall asset inflows.
While lower interest rates and elevated technology-upgrade-related expenses might hamper profitability, investment managers’ revenues are likely to grow on rising assets under management (AUM) balances. Thus, industry players like BlackRock, Inc. (BLK - Free Report) , Franklin Resources, Inc. (BEN - Free Report) and Affiliated Managers Group, Inc. (AMG - Free Report) should gain.
About the Industry
The Zacks Investment Management industry consists of firms that manage securities and funds for clients to meet specified investment goals. These companies 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 Keep an Eye on
Net Inflows to Continue to Aid AUM Growth: In 2020 and the first couple of months 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. While markets began to normalize from the second quarter of this year, overall client activity has remained decent. Moreover, while some industry players have been witnessing asset outflows, the majority have seen inflows in the past few months on growing investor optimism regarding the economic recovery. Thus, driven by rising inflows, growth in AUM is expected to continue in the near term. Asset managers’ top line is thus expected to improve, supported by higher performance fees and investment advisory fees, which constitute the majority of their revenues.
Shift in Preferences, Relatively Low Interest Rates Likely to Keep Margins Under Pressure: Given the continued need for low-cost investment strategies, the demand for passive investing is expected to increase, similar to the past few years. Because of this, margins of asset managers might remain under pressure. The near-zero interest-rate environment has also been hurting margin growth to an extent since the past few quarters. While the Federal Reserve has signaled as many as three rate hikes next year, relatively lower rates might keep margins under pressure. Yet, the rise in industry consolidation witnessed since the beginning of 2020 amid the pandemic is likely to offer some support to investment managers’ profits.
Rising Technology Costs are 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 rise. These will likely lead to an increase in overall expenses.
Zacks Industry Rank Indicates Bright 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 #47, which places it at the top 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 outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of bright earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have confidence in this group’s bottom-line growth potential. The industry’s current-year earnings estimates have been revised 20.7% upward since December 2020-end.
Before we present a few investment management stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector but Underperforms the S&P 500
While the Zacks Investment Management industry has underperformed the S&P 500 composite, it has outperformed its sector over the past two years.
Stocks in the industry have collectively gained 30.4% in the past two years, outperforming the Zacks Finance sector’s rally of 16.4%. However, the S&P 500 composite has grown 47.1% over the same period.
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 3.55X. This compares with the highest level of 4.14X, the lowest level of 2.01X and median of 3.48X over the past five years. Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 17.37X, 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 decent discount. The Zacks Finance sector’s trailing 12-month P/TB of 4.43X for the same period is above the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 Investment Management Stocks Worth Betting On
BlackRock: This New York, NY-based Zacks Rank #2 (Buy) company is the largest asset manager by assets in the United States with a market capitalization of $136.3 billion. The company’s diversified products, revenue mix and inorganic expansion efforts have been aiding AUM growth. As of Sep 30, 2021, BlackRock had total AUM worth $9.46 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 July 2021, it agreed to make a minority investment in SpiderRock Advisors, while in June, 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.
In the past year, shares of BlackRock have gained 29.4%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2021 and 2022 earnings has been revised marginally upward to $38.93 and $42.39 per share, respectively.
Price and Consensus: BLK
Franklin Resources: Based in San Mateo, CA, Franklin Resources is a global investment management company with a market cap of $16.2 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 Sep 30, 2021, the Zacks Rank #1 (Strong Buy) company had AUM of $1.5 trillion. It has a strong distribution platform that has increased diversification inflows across funds, vehicles and asset classes as well as key businesses growth. Moreover, the company has been an early entrant in many foreign markets, enjoying a first-mover advantage. It tries to attract, retain and develop employees as well as invest tactically in systems and technology, which provides a secure and stable environment.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has been engaged in inorganic expansion efforts, which have enhanced its foothold. This November, in a bid to bulk up its offerings in the alternative investment space, Franklin Resources inked an agreement to acquire Lexington Partners. In October, it announced the acquisition of O’Shaughnessy Asset Management, LLC. Franklin Resources 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.
Over the past year, shares of the company have gained 30.9%. Over the past 60 days, the Zacks Consensus Estimate for its current fiscal year and next fiscal year earnings has been revised upward by 6.9% and 9.2%, respectively, to $3.55 and $3.79 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, alternative and fixed-income products. The company has a market cap of $6.3 billion.
As of Sep 30, 2021, this Zacks Rank #2 company had total AUM of $747.8 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 acquisition of a majority stake in Parnassus Investments along with the buyouts of minority stakes in OCP Asia and Boston Common Asset Management are steps in this direction.
Affiliated Managers’ stock has gained 55.3% over the past 12 months. The Zacks Consensus Estimate for its 2021 earnings has been raised by 5.5% over the past 60 days to $18.11 per share. Likewise, earnings estimates for 2022 have been revised upward by 5% to $20.92.
Price and Consensus: AMG