Investment Management industry is being aided by the significant rise in equity market volatility and higher client activity due to the coronavirus outbreak. Thus, these have resulted in steady inflows, which have been supporting assets under management (AUM) growth. While near-zero interest rates and increasing expenditure on technology upgrades are hampering profitability to some extent, investment managers’ revenue growth is expected to continue in the near term on rising assets balances. Thus, some of the industry players like BlackRock, Inc. ( BLK Quick Quote BLK - Free Report) , Invesco Ltd. ( IVZ Quick Quote IVZ - Free Report) and Cohen & Steers, Inc. ( CNS Quick Quote CNS - Free Report) are set to gain from the positive developments. Industry Description
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. 3 Investment Management Industry Trends to Keep an Eye on Steady Inflows to Aid AUM Growth: 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 of the year mostly witnessed asset outflows, which led to a decline in AUM balance for the majority of the industry players; the trend reversed post that on growing investor optimism. Thus, driven by rising inflows, growth in AUM is expected to continue in the near term. Thus, asset managers’ top line will likely improve, supported by higher performance fees and investment advisory fees, which constitute the majority of their revenues. Low Rates, Shift in Preference to Continue to Hurt Margins: Given the continued need for low-cost investment strategies, the demand for passive investing is expected to continue, similar to the past few years. Thus, margins of asset managers are likely to remain under pressure. Moreover, given the low interest-rate environment along with the Fed signaling no change in rates anytime soon, margins are expected to continue to be hampered to an extent in the near term. Yet, the rise in industry consolidation since the beginning of the year amid the pandemic might 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 continue 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 46-stock group within the broader Zacks
Finance sector. The industry currently carries a Zacks Industry Rank #100, which places it at the top 39% 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 bright earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are 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 21.5% 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 Outperforms Sector but Underperforms the S&P 500
The Zacks Investment Management industry has underperformed the S&P 500 composite but outperformed its sector over the past two years.
Stocks in the industry have collectively gained 26.5% over this period. The Zacks Finance sector has rallied 5%, while the Zacks S&P 500 composite has grown 36.2% 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 2.52X. This compares with the highest level of 3.72X, the lowest level of 1.65X and median of 3.08X 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 15.97X, 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 3.69X 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 investment manager in the United States based on assets. It offers products that span the risk spectrum, including active, enhanced and index strategies through a variety of structures like separately managed accounts, mutual funds, iShares exchange traded funds (ETFs) and other pooled investment vehicles. As of Sep 30, 2020, BlackRock had total AUM worth $7.81 trillion. Constant improvement in AUM balance along with impressive inorganic expansion efforts has been aiding the top line. BlackRock’s broad product diversification, its efforts to strengthen the iShares and ETF operations, and increased focus on the active equity business remain impressive. Moreover, the company hikes dividend annually and has an efficient share repurchase plan in place. Over the past six months, shares of the company have gained 33.5%. Over the past 60 days, the Zacks Consensus Estimate for its 2020 and 2021 earnings has been revised upward by 7.9% and 9.2%, respectively, to $32.10 and $35.01 per share. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Price and Consensus: BLK Cohen & Steers: With total AUM worth $70.5 billion as of Sep 30, 2020, this Zacks Rank #2 investment manager operates through three investment vehicles — Institutional Accounts, Open-end Funds and Closed-end Funds. Headquartered in New York City, it focuses primarily on liquid real assets, including real estate securities, commodities and natural resource equities, and preferred securities. Cohen & Steers’ diverse product offerings and investment strategies attract investors and thus support revenue growth. While the pandemic-induced slowdown hampered AUM growth to some extent, its AUM balance is expected to improve once the economy stabilizes, thereby, continuing to aid revenues. Also, since 2011, it has been hiking dividends annually. The stock has gained 9.7% over the past six months. The Zacks Consensus Estimate for its 2020 earnings has been raised by 6.5% over the past 60 days to $2.46 per share. Likewise, earnings estimates for 2021 have been revised upward by 11.7% to $2.77. Price and Consensus: CNS Invesco: Headquartered in Atlanta, GA, Invesco — formerly AMVESCAP PLC — operates as an independent investment manager. The company was incepted in 1935 and has offices in more than 20 countries. As of Sep 30, 2020, its AUM totaled $1,218.2 billion. Invesco’s asset classes include money market, fixed income, balanced income, equity and alternatives. The Zacks Rank #2 company acquired OppenheimerFunds, Inc. in 2019, which resulted in a substantial rise in AUM balance, making it one of the leading global asset managers. In fact, Invesco remains well-positioned for top-line growth, given its robust institutional pipeline, solid retail channel and synergies from several acquisitions done over the past few years. Over the past six months, shares of the company have gained more than 100%. Over the past 60 days, the Zacks Consensus Estimate for its 2020 and 2021 earnings has been revised upward by 9.6% and 18.6%, respectively, to $1.72 and $2.04 per share. Price and Consensus: IVZ