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Analyst Blog

If you have an investment preference in the finance sector, perhaps the time is ripe to shift your focus from Banks to Asset Managers. This is because banks now look riskier compared to asset managers – at least the string of lawsuits against banks, revenue pressure, and the related damages convey this notion.

Moreover, in terms of stock price, asset managers have shown a better performance than banks in the past few months. This is evident from the Dow Jones U.S. Asset Managers Index’s 1.5% gain compared to the Dow Jones U.S. Banks Index’s 3.2% loss over the last three months.

The traditional view is that investment in large cap banking stocks provide good returns and to some extent are safe owing to their “too-big-to-fail” status. However, it would be wise to understand the demerits of the sector considering the current happenings.  

The Visible Demerits of Banks

Given the competitive environment and the stringent regulatory landscape, banks are facing tough challenges in controlling costs. This is certainly restricting their bottom-line growth. And to make matters worse, a number of major banks are facing legal overhangs in recent times.

Further, due to a prolonged low interest rate environment, several banks are witnessing continuous decline in net interest income and pressure on net interest margin. So a significant turn around seems elusive in the near term.

Also, as banks finance themselves through customers’ deposits and borrowings from the market to generate loans or make investments, it leads to balance-sheet risks.

Asset Managers – The Hidden Merits

Asset managers are relatively in a better position in terms of the headwinds that the overall finance sector is facing. Though the growth of asset management business has not been too impressive in recent times owing to investors’ skepticism about the economy and the market, not too many asset managers are burdened with significant legal hassles. As a result, asset managers have been enjoying comparative advantage over banks in terms of cost management.

Moreover, asset managers do not invest their own accounts, so the recent market risks can’t damage their balance sheet. This is because asset managers act as agents of their clients, i.e., they primarily manage assets on behalf of their clients in exchange of fee. So losses incurred or gains realized solely pertain to clients.

On the regulation front, though the asset management companies have recently drawn regulators’ attention owing to less transparency and certain underlying risks, there is no major downside visible in the near term.

Further, asset management stocks are expected to perform well in the upcoming quarters with the rising demand for personalized and alternative investment solutions. Even if the interest rate environment does not exhibit a turnaround, asset managers will not suffer like banks.

Given the underlying strength in the industry, it will be a prudent decision to bet on a few asset management stocks that have been witnessing positive earnings estimate revisions and thus carry a favorable Zacks Rank.   

3 Asset Managers to Buy Now

Here we have handpicked 3 stocks in the asset management space that are poised to add return to your portfolio:

Cohen & Steers Inc. is a Zacks Rank #1 (Strong Buy) stock with long term growth rate of 14.95% and dividend yield of 2.32%.  The Zacks Consensus Estimate for the current year is $1.83 per share. Over the past 3 months, estimates have moved north 6.4%.

Based in New York, Cohen & Steers is engaged in managing institutional accounts, open-end mutual funds, and closed-end mutual funds and alternative investment strategies as well.

Artisan Partners Asset Management Inc. is a Zacks Rank #2 (Buy) stock with long term growth rate of 14.17% and dividend yield of 3.95%.  The Zacks Consensus Estimate for the current year is $3.33 per share. Over the past 3 months, estimates have inched up by 2.1%.

Based in Wisconsin, Artisan Partners is engaged in providing investment management services to institutional clients including pension and profit sharing plans, endowments, foundations, government entities, and private and foreign investment companies.

Ameriprise Financial, Inc. is a Zacks Rank #2 (Buy) stock with long term growth rate of 14.95% and dividend yield of 2.32%.  The Zacks Consensus Estimate for the current year is $8.26 per share. Over the past 3 months, estimates have risen by 2.5%.

Headquartered in Minneapolis, Minnesota, Ameriprise Financial offers an array of financial products and services that are customized as solutions for cash and liquidity, asset accumulation, income, protection, and estate and wealth transfer needs. Its client list comprises individuals, businesses and institutions.

Bottom Line

The business expansion of asset managers will be restricted if the regulators impose capital and liquidity rules on them similar to what is already there for banks. However, as there is no clear timeline provided by the regulators, these stocks should enjoy the flexibility until the imposition of regulatory restrictions.          

So you should not miss the opportunity of capitalizing on the near-term prospects of asset managers.
 

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