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3 Investment Management Stocks to Look at Despite Industry Woes
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The continued shift in investor preference toward passive investment strategies is expected to hamper top-line growth of the Zacks Investment Management industry stocks. Moreover, elevated technology costs will likely hurt profitability to an extent.
Amid the pandemic-induced uncertainty, investment management companies benefited from significantly higher volatility and client activity. However, now, amid the subdued market volatility, investment managers are not expected to witness significant growth in their assets under management (AUM) balances due to volatile asset flows. Yet, firms like BlackRock, Inc. (BLK - Free Report) , T. Rowe Price Group (TROW - Free Report) and Invesco Ltd. (IVZ - Free Report) will benefit in an increasing rate environment.
About the Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals. They 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 to manage their assets, helps reduce the impact of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Watch
A Volatile Trend in Asset Flows May Hurt AUM Growth: In 2020 and the first half 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. In the second half of 2021, markets began to normalize, with client activity remaining decent. Year 2022 again witnessed an unexpected rise in volatility and relatively higher client activity, resulting in asset inflows for the majority of the industry players. However, so far in 2023, market volatility has decreased, resulting in subdued client activity. Because of this, various asset managers are experiencing asset outflows. Thus, amid the current challenging market conditions, AUM growth might be hampered due to a volatile trend in asset flows. Asset managers’ top lines are, therefore, expected to be adversely impacted to some extent because of lower performance fees and investment advisory fees, which constitute the majority of their revenues.
Despite Higher Interest Rates, Shift in Preferences Might Hamper Margins: Interest rate hikes from the beginning of 2022 have resulted in an improvement in investment managers’ margins. Also, the rise in industry consolidation witnessed since 2020 is likely to continue supporting bottom-line growth. However, given the continued need for low-cost investment strategies, the demand for passive investing has been on the rise, which has hurt investment managers’ margin growth to an extent. Thus, despite the Federal Reserve’s plan to keep interest rates high in the near term, investment managers’ margins may not improve significantly because of the shift in preference. Also, higher funding and deposit costs might weigh on margin growth to some extent.
Elevated Costs Are Concerning: Tighter regulations to increase transparency have led to a rise in compliance costs for investment managers. Also, as wealth managers are constantly trying to upgrade technology to keep up with evolving customer needs, technology costs are expected to keep rising. These will likely lead to an increase in overall expenses, thus, hurting investment managers’ bottom lines.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 38-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #230, which places it at the bottom 6% 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 underperformance 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 bottom 50% of the Zacks-ranked industries is a result of a dismal earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s bottom-line growth potential. The industry’s current-year earnings estimates have been revised 10.8% lower since the end of Oct 2022.
Despite the near-term challenges, we present a few stocks that you may want to keep an eye on. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Investment Management industry has underperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively lost 29.7%. The S&P 500 composite has declined 11.8%, whereas the Zacks Finance Sector has depreciated 17.6%.
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 3.15X. This compares with the highest level of 5.42X, the lowest level of 2.12X and the median of 3.67X over the past five years. Additionally, the industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 9.40X, 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 3.98X for the same period is slightly above the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 Investment Management Stocks to Keep an Eye On
BlackRock: The New York, NY-based Zacks Rank #3 (Hold) company is the largest asset manager (by assets) in the United States, with a market capitalization of almost $90 billion. The company’s broad product diversification, its revenue mix and steadily improving AUM balance have been aiding the top line. As of Sep 30, 2022, BlackRock had total AUM of $9.10 trillion.
Over the last six years (2016-2022), the company’s revenues (on a GAAP basis) witnessed a compound annual growth rate (CAGR) of 6.5%. While revenues declined in the first nine months of 2023, the trend will likely reverse in the future. Given the company’s efforts to strengthen the iShares and exchange-traded funds (ETF) operations, and increased focus on the active equity business, its top line is expected to be positively impacted.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In August 2023, the company closed the acquisition of London-based Kreos Capital, which will further bolster its position as the leading global credit asset manager. Also, it agreed to form a joint venture with Jio Financial Services Limited, named Jio BlackRock, which is set to revolutionize India's asset management industry.
In 2021, BLK acquired the Climate Change Scenario Model of Baringa Partners and 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.
So far this year, shares of BlackRock have lost 14.3%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2023 earnings has been revised 1.9% higher to $36.15 per share, whereas its 2024 earnings estimates have witnessed a downward revision of 4.9% to $38.18.
Price and Consensus: BLK
T. Rowe Price: Headquartered in Baltimore, the company is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans, and financial intermediaries.
TROW, with a market capitalization of almost $20 billion, had a total AUM of $1.36 trillion as of Sep 30, 2023. Supported by a diverse business model, the company’s AUM witnessed a CAGR of 5.2% over the past five years (2017-2022), with the upward momentum continuing in the first nine months of 2023.
Its strong brand, consistent investment record and decent business volumes are expected to keep supporting AUM growth.
Also, the company’s net revenues saw a three-year (ended 2022) CAGR of 2.2%. TROW’s focus on fortifying its business by enhancing investment capabilities and broadening distribution reach will continue to support the top line.
T. Rowe Price’s inorganic growth efforts are also impressive. In April 2023, it acquired Retiree, a fintech firm providing innovative retirement income planning software. The acquisition is expected to expand TROW’s existing retirement capabilities, enabling a comprehensive suite of retirement income solutions for investors and practitioner tools for financial professionals. Further, T. Rowe Price expanded its footprint and capabilities through the acquisition of OHA in 2021. With this acquisition, it bulked up its offerings in the alternative investment market space.
As the company is committed to diversifying its revenue streams and meeting customer needs, we expect such endeavors to support its long-term prospects.
So far this year, shares of TROW have lost 17.5%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2023 earnings has been revised marginally lower to $7.16 per share, whereas its 2024 earnings estimates have witnessed a downward revision of 2.5% to $7.27. TROW currently carries a Zacks Rank of 3.
Invesco: Headquartered in Atlanta, GA, the company — formerly AMVESCAP PLC — operates as an independent investment manager, and offers a wide range of investment products and services. Invesco has offices in more than 20 countries and as of Sep 30, 2023, it had AUM worth $1.49 trillion.
The Zacks Rank #3 company, with a market cap of slightly more than $5 billion, has been witnessing a consistent improvement in AUM. Though the total AUM balance declined in 2022, the same witnessed a CAGR of 2.2% over the three years ended 2022. The upward momentum continued in the first nine months of 2023. The acquisition of OppenheimerFunds primarily resulted in the rise in the company's AUM, making it one of the leading global asset managers.
Moreover, IVZ has been undertaking initiatives to improve operating efficiency. Though the company’s operating expenses have recorded a rise in the past, the same has been decreasing for the past few years. IVZ’s total operating expenses saw a negative CAGR of 4.8% over the last three years (ended 2022).
Apart from a strong presence in the United States, Invesco maintains a solid foothold in Europe, Canada and the Asia Pacific. Acquisitions of the leading U.K.-based advisor-focused digital solutions firm Intelliflo, along with Europe-based Source, a leading, independent specialist provider of ETFs, to improve market share globally continue to support Invesco’s global presence. Broad diversification will likely help the company generate further momentum from business in such regions.
IVZ’s shares have lost 28% so far this year. Over the past 60 days, the Zacks Consensus Estimate for its current-year earnings has been revised 5.9% lower to $1.44 per share. Likewise, earnings estimates for the next year have been revised 12.7% lower to $1.65.
Price and Consensus: IVZ
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3 Investment Management Stocks to Look at Despite Industry Woes
The continued shift in investor preference toward passive investment strategies is expected to hamper top-line growth of the Zacks Investment Management industry stocks. Moreover, elevated technology costs will likely hurt profitability to an extent.
Amid the pandemic-induced uncertainty, investment management companies benefited from significantly higher volatility and client activity. However, now, amid the subdued market volatility, investment managers are not expected to witness significant growth in their assets under management (AUM) balances due to volatile asset flows. Yet, firms like BlackRock, Inc. (BLK - Free Report) , T. Rowe Price Group (TROW - Free Report) and Invesco Ltd. (IVZ - Free Report) will benefit in an increasing rate environment.
About the Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals. They 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 to manage their assets, helps reduce the impact of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Watch
A Volatile Trend in Asset Flows May Hurt AUM Growth: In 2020 and the first half 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. In the second half of 2021, markets began to normalize, with client activity remaining decent. Year 2022 again witnessed an unexpected rise in volatility and relatively higher client activity, resulting in asset inflows for the majority of the industry players. However, so far in 2023, market volatility has decreased, resulting in subdued client activity. Because of this, various asset managers are experiencing asset outflows. Thus, amid the current challenging market conditions, AUM growth might be hampered due to a volatile trend in asset flows. Asset managers’ top lines are, therefore, expected to be adversely impacted to some extent because of lower performance fees and investment advisory fees, which constitute the majority of their revenues.
Despite Higher Interest Rates, Shift in Preferences Might Hamper Margins: Interest rate hikes from the beginning of 2022 have resulted in an improvement in investment managers’ margins. Also, the rise in industry consolidation witnessed since 2020 is likely to continue supporting bottom-line growth. However, given the continued need for low-cost investment strategies, the demand for passive investing has been on the rise, which has hurt investment managers’ margin growth to an extent. Thus, despite the Federal Reserve’s plan to keep interest rates high in the near term, investment managers’ margins may not improve significantly because of the shift in preference. Also, higher funding and deposit costs might weigh on margin growth to some extent.
Elevated Costs Are Concerning: Tighter regulations to increase transparency have led to a rise in compliance costs for investment managers. Also, as wealth managers are constantly trying to upgrade technology to keep up with evolving customer needs, technology costs are expected to keep rising. These will likely lead to an increase in overall expenses, thus, hurting investment managers’ bottom lines.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 38-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #230, which places it at the bottom 6% 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 underperformance 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 bottom 50% of the Zacks-ranked industries is a result of a dismal earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s bottom-line growth potential. The industry’s current-year earnings estimates have been revised 10.8% lower since the end of Oct 2022.
Despite the near-term challenges, we present a few stocks that you may want to keep an eye on. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Investment Management industry has underperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively lost 29.7%. The S&P 500 composite has declined 11.8%, whereas the Zacks Finance Sector has depreciated 17.6%.
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 3.15X. This compares with the highest level of 5.42X, the lowest level of 2.12X and the median of 3.67X over the past five years. Additionally, the industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 9.40X, 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 3.98X for the same period is slightly above the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 Investment Management Stocks to Keep an Eye On
BlackRock: The New York, NY-based Zacks Rank #3 (Hold) company is the largest asset manager (by assets) in the United States, with a market capitalization of almost $90 billion. The company’s broad product diversification, its revenue mix and steadily improving AUM balance have been aiding the top line. As of Sep 30, 2022, BlackRock had total AUM of $9.10 trillion.
Over the last six years (2016-2022), the company’s revenues (on a GAAP basis) witnessed a compound annual growth rate (CAGR) of 6.5%. While revenues declined in the first nine months of 2023, the trend will likely reverse in the future. Given the company’s efforts to strengthen the iShares and exchange-traded funds (ETF) operations, and increased focus on the active equity business, its top line is expected to be positively impacted.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In August 2023, the company closed the acquisition of London-based Kreos Capital, which will further bolster its position as the leading global credit asset manager. Also, it agreed to form a joint venture with Jio Financial Services Limited, named Jio BlackRock, which is set to revolutionize India's asset management industry.
In 2021, BLK acquired the Climate Change Scenario Model of Baringa Partners and 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.
So far this year, shares of BlackRock have lost 14.3%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2023 earnings has been revised 1.9% higher to $36.15 per share, whereas its 2024 earnings estimates have witnessed a downward revision of 4.9% to $38.18.
Price and Consensus: BLK
T. Rowe Price: Headquartered in Baltimore, the company is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans, and financial intermediaries.
TROW, with a market capitalization of almost $20 billion, had a total AUM of $1.36 trillion as of Sep 30, 2023. Supported by a diverse business model, the company’s AUM witnessed a CAGR of 5.2% over the past five years (2017-2022), with the upward momentum continuing in the first nine months of 2023.
Its strong brand, consistent investment record and decent business volumes are expected to keep supporting AUM growth.
Also, the company’s net revenues saw a three-year (ended 2022) CAGR of 2.2%. TROW’s focus on fortifying its business by enhancing investment capabilities and broadening distribution reach will continue to support the top line.
T. Rowe Price’s inorganic growth efforts are also impressive. In April 2023, it acquired Retiree, a fintech firm providing innovative retirement income planning software. The acquisition is expected to expand TROW’s existing retirement capabilities, enabling a comprehensive suite of retirement income solutions for investors and practitioner tools for financial professionals. Further, T. Rowe Price expanded its footprint and capabilities through the acquisition of OHA in 2021. With this acquisition, it bulked up its offerings in the alternative investment market space.
As the company is committed to diversifying its revenue streams and meeting customer needs, we expect such endeavors to support its long-term prospects.
So far this year, shares of TROW have lost 17.5%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2023 earnings has been revised marginally lower to $7.16 per share, whereas its 2024 earnings estimates have witnessed a downward revision of 2.5% to $7.27. TROW currently carries a Zacks Rank of 3.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TROW
Invesco: Headquartered in Atlanta, GA, the company — formerly AMVESCAP PLC — operates as an independent investment manager, and offers a wide range of investment products and services. Invesco has offices in more than 20 countries and as of Sep 30, 2023, it had AUM worth $1.49 trillion.
The Zacks Rank #3 company, with a market cap of slightly more than $5 billion, has been witnessing a consistent improvement in AUM. Though the total AUM balance declined in 2022, the same witnessed a CAGR of 2.2% over the three years ended 2022. The upward momentum continued in the first nine months of 2023. The acquisition of OppenheimerFunds primarily resulted in the rise in the company's AUM, making it one of the leading global asset managers.
Moreover, IVZ has been undertaking initiatives to improve operating efficiency. Though the company’s operating expenses have recorded a rise in the past, the same has been decreasing for the past few years. IVZ’s total operating expenses saw a negative CAGR of 4.8% over the last three years (ended 2022).
Apart from a strong presence in the United States, Invesco maintains a solid foothold in Europe, Canada and the Asia Pacific. Acquisitions of the leading U.K.-based advisor-focused digital solutions firm Intelliflo, along with Europe-based Source, a leading, independent specialist provider of ETFs, to improve market share globally continue to support Invesco’s global presence. Broad diversification will likely help the company generate further momentum from business in such regions.
IVZ’s shares have lost 28% so far this year. Over the past 60 days, the Zacks Consensus Estimate for its current-year earnings has been revised 5.9% lower to $1.44 per share. Likewise, earnings estimates for the next year have been revised 12.7% lower to $1.65.