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Investment Management Industry Outlook Bright on Asset Inflows

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The Zacks Investment Management industry consists of companies 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 by themselves. The diversification helps in reducing the impact of volatility and hence ensures steady returns over time, as investment managers invest clients’ assets in different asset classes, depending on their needs and risk-taking abilities.

Some of the prominent names in the industry are Affiliated Managers Group, Inc. (AMG - Free Report) , Ameriprise Financial, Inc. (AMP - Free Report) , Franklin Resources, Inc. (BEN - Free Report) , BlackRock, Inc. (BLK - Free Report) , Invesco Ltd. (IVZ - Free Report) , T. Rowe Price Group, Inc. (TROW - Free Report) and Principal Financial Group, Inc. (PFG - Free Report) .

Here are the industry’s three major themes:
 

  • Since the coronavirus outbreak in mid-March, there has been a significant rise in equity market volatility along with solid client activity. While the first quarter witnessed steady asset outflows, which led to decline in assets under management (AUM) balance for majority of the industry players; the trend seems to have reversed of late on growing investor optimism. Thus, driven by rising inflows, growth in AUM is expected to continue in the near term. And, since the majority of asset managers’ revenues come from performance fees and investment advisory fees, their top lines are expected to improve modestly.
     
  • Given the continued need for low-cost investment strategies, the demand for passive investing has been on the rise for the past few years. The same trend is likely to continue in the near-term. Thus, due to the continued shift toward lower-cost passive mandates, margins of asset managers are likely to remain under pressure. Moreover, near-zero interest rates are expected to hurt margins to some extent. Nonetheless, there has been a rise in industry consolidation since the beginning of 2020, which might offer some support to investment managers’ top line.
     
  • The tightening of regulations to increase transparency has led to a rise in compliance costs for investment managers. Moreover, as wealth managers are constantly trying to upgrade technology to keep up with the evolving customer needs, technology costs are expected to continue rising. These will likely lead to an increase in overall expenses.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Investment Management industry is a 48-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #21, which places it at the top 8% 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 outperforms 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 decent earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s bottom-line growth potential. Since April 2020-end, the industry’s earnings estimates for the current year have been revised 10.6% upward.

Before we present a few 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 Underperforms Sector and S&P 500

The Zacks Investment Management industry has underperformed both the S&P 500 composite and its own sector over the past two years.

Stocks in the industry have collectively lost 15.6% over this period. The Zacks Finance sector has declined 14.1%, while the Zacks S&P 500 composite has grown 14% over the same period.


Two-Year Price Performance





 

 

Industry’s 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 3.52X. This compares with the highest level of 3.72X, the lowest level of 1.64X and median of 3.05X 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 12.74X, 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 slight premium. The Zacks Finance sector’s trailing 12-month P/TB of 3.33X for the same period is slightly below that for the Zacks Investment Management industry, as the chart below shows.


Price-to-Tangible Book Ratio (TTM)





 

 

Bottom Line

While margin compression, and escalating compliance and technology costs are expected to hurt investment managers’ profits in the near term, there have been a rise in consolidation among industry players. This will likely improve market share and aid top-line growth. Also, with the rise in AUM balance, revenues are expected to improve.

One should particularly consider betting on investment management stocks with an upbeat earnings outlook. We are presenting four stocks with a Zacks Rank #1 (Strong Buy) that investors may consider betting on.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Cohen & Steers, Inc. (CNS - Free Report) : The New York-based company has gained 7.7% so far this year. The Zacks Consensus Estimate for its 2020 earnings has been raised 12.9% over the past 60 days. It has a projected year-over-year earnings growth rate of 7.2% for 2021. Also, its long-term (three-five years) projected earnings growth rate is 12.9%.


Price and Consensus: CNS





 

 

AllianceBernstein Holding L.P. (AB - Free Report) : The Zacks Consensus Estimate for earnings of the New York-based company has been revised upward by 11.1% for the current year over the past 60 days. Its earnings are projected to witness year-over-year growth of 9.4% in the current year. The stock has lost 5.6% so far this year. Over the long term, its earnings are projected to grow 6.5%.


Price and Consensus: AB





 

 

Artisan Partners Asset Management Inc. (APAM - Free Report) : This Milwaukee, WI-based company’s earnings are projected to grow 6.6% in 2021 on a year-over-year basis. The consensus estimate for its current-year earnings has been revised 12.1% upward over the past 60 days. The stock has gained 6.1% year to date. Its earnings are projected to grow 5.8% over the long term.


Price and Consensus: APAM





 

 

Legg Mason, Inc. : The Baltimore-based company has gained 38.7% so far this year. The Zacks Consensus Estimate for its earnings for the current fiscal year has been revised 11% upward over the past 60 days. Its earnings are expected to witness 14.5% growth in the next fiscal year on a year-over-year basis. Moreover, its long-term estimated earnings growth rate is 11.4%.


Price and Consensus: LM




 

 

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