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Investment Management Stock Outlook: Prospects Look Bleak

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Given the current macroeconomic challenges, it may not be easy for investment management companies to deliver a decent performance in the near future. Particularly, the uncertainty related to the ongoing trade war, which has led to the volatility of overall equity flows, might continue to be a pain for these companies. There have been active equity inflows in some of the months, but the investment managers majorly witnessed outflows.

Also, due to growing customer demand for passive products, the performance of active managers remained subdued. Moreover, increasing competition could make it difficult for the small-scale investment managers to grow significantly.

As investors are now looking for low-cost investment strategies, margins for investment managers, which have been on a downtrend in the past few years, may continue to remain under pressure.

Further, investment managers’ compliance costs have been escalating with tightening regulations to increase transparency. Also, as these wealth managers are trying to upgrade technology to keep up with the evolving customer needs, technology costs should keep on increasing.

Relative Performance of the Industry

Looking at shareholder returns over the past two years, it appears that the broader economic recovery wasn’t enough for enhancing investors’ confidence in the industry’s growth prospects.

The Zacks Investment Management Industry, which is a 51-stock group within the broader Zacks Finance Sector, has underperformed both the S&P 500 and its own sector over the past two years.

While the stocks in this industry have collectively gained 19.6%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 35.3% and 26.5%, respectively.


Two-Year Price Performance




 

Investment Management Stocks Trading Cheap

Thanks to the underperformance over the past two years, the industry’s valuation looks cheap now. One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is the most appropriate multiple for valuing finance companies because of large variations in their earnings results from one quarter to the next.

This ratio essentially measures a bank's current market value relative to what it would be worth if all assets were sold, debt was paid, and intangible assets were written off.

The industry currently has a trailing 12-month P/TBV ratio of 2.65, which is lower the median level of 2.71 for the range over the past two years. When compared with the highest level of 3.26 in that period, there is apparently a decent upside left.

In fact, the space looks pretty cheap when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 11.13 and the median level is 9.22.



Price-to-Tangible Book Ratio (TTM)



 

As finance stocks typically have a lower P/TBV ratio, comparing investment managers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance Sector’s trailing 12-month P/TBV ratio of 3.68 and the median level of 3.53 for the same period are above the Zacks Investment Management Industry’s respective ratios.



Price-to-Tangible Book Ratio (TTM)



 

Earnings Outlook Doesn’t Look Reassuring

Despite the mounting competitive pressure from passive trading strategies as well as rising regulatory and technology costs, the fundamentals of investment managers should help the industry continue generating positive returns in the near future. But what really matters to investors is whether this group has the potential to outperform the broader market in the quarters ahead.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for an industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.



Price and Consensus: Zacks Investment Management industry



 

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $3.22 'EPS' estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Investment Management industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the dollar earnings of $3.22 'per share' of the industry for 2018, but how this dollar number has evolved recently.



Current-Year EPS Estimate Revisions



 

As you can see here, the $3.22 'EPS' estimate for 2018 has declined from $3.29 in June 2018 and also from $3.26 this time last year. In other words, the sell-side analysts covering the companies in the Zacks Investment Management industry have been lowering their estimates.

Zacks Industry Rank Shows Early Signs of Improvement

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates no significant recovery in performance in the near term.

The Zacks Investment Management industry currently carries a Zacks Industry Rank #116, which places it at the top 45% of more than 250 Zacks industries.

However, our proprietary Heat Map shows that the industry’s rank has improved just recently after remaining in the bottom 50% for the last seven weeks. So, one should wait for the rank to be stable in the top 50% before becoming bullish on the Industry’s near-term prospects.






 

Cloudy Long-Term Growth Prospects

The long-term (3-5 years) EPS growth estimates for the Zacks Investment Management industry doesn’t seem much impressive either. The group’s mean estimate of long-term EPS growth rate has been decreasing since October 2017 to become relatively stable in June 2018 and reach the current level of 10.14%. This compares with 10.49% for the Zacks Finance Sector.



Mean Estimate of Long-Term EPS Growth Rate



 

In fact, since the beginning of 2016, revenues have been quite volatile, mainly because of the instability seen in equity flows and the competitive pricing pressure.






 

Bottom Line

The growth prospects for the investment management industry is not very bright. But, keeping the early signs of improvement in analysts’ evaluation in mind, investors could take advantage of the cheap valuation and bet on a few stocks in this space that have a strong earnings outlook.

3 Investment Management Stocks to Bet on

Waddell & Reed Financial, Inc.’s Zacks Consensus Estimate for the current-year earnings has been revised 1.9% upward over the past 60 days. Its shares have gained 6.3% over the past year. The stock currently carries a Zacks Rank #2 (Buy). (You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)



Price and Consensus: WDR



 

SEI Investments Co.’s (SEIC - Free Report) shares have gained nearly 1% in a year’s time. Earnings estimates of this Zacks Rank #2 stock has increased marginally for the current year, in the past 60 days.



Price and Consensus: SEIC



 

The Blackstone Group L.P. (BX - Free Report) also has a Zacks Rank of 2. Its Zacks Consensus Estimate for the current-year earnings has been revised 1% upward over the past 60 days. Its shares have gained 14.1% over the past year.



Price and Consensus: BX




 

However, it’s better to stay away from the following stocks carrying a Zacks Rank #4 (Sell):

Affiliated Managers Group, Inc. (AMG - Free Report) shares have lost 27.2% over the past year. Its Zacks Consensus Estimate for the current-year earnings has been revised 3.9% downward over the past 60 days.



Price and Consensus: AMG



 

Invesco Ltd. (IVZ - Free Report) shares have lost 34.1% over the past year. Its Zacks Consensus Estimate for the current-year earnings has been revised marginally downward over the past 60 days.



Price and Consensus: IVZ


 

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