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3 Stocks From the Prospering Investment Management Industry

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The current high interest rate environment is expected to keep supporting revenues for the Zacks Investment Management industry stocks. While the continued shift in investor preference toward passive investing has been weighing on margins to an extent, higher rates will continue to provide support in the near term.

Despite relatively subdued market volatility, investment managers are expected to witness improvements in their assets under management (AUM) balances, driven by overall asset inflows. Thus, industry players like BlackRock, Inc. (BLK - Free Report) , SEI Investments Company (SEIC - Free Report) and Affiliated Managers Group (AMG - Free Report) are expected to benefit, going forward.

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 impacts of volatility and ensures steady returns over time.

3 Investment Management Industry Trends to Watch

Overall Asset Inflows to Support AUM Growth: In 2020 and the first half of 2021, there was a significant rise in equity market volatility and 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 being 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. While 2023 and the first three months of 2024 saw relatively subdued market volatility, client activity remained decent on the back of investors seeking higher yields from different asset classes. Specifically, client activity increased at the end of last year after the Federal Reserve announced a pause in rate hikes. Thus, supported by overall asset inflows, growth in AUM is expected to continue. Asset managers’ top lines are, therefore, expected to be positively impacted by higher performance fees and investment advisory fees, which constitute the majority of their revenues.

Despite Preference Shift, Higher Interest Rates to Aid Margin Growth: 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. However, the interest rate hikes from the beginning of 2022 resulted in an improvement in margins. Also, the rise in industry consolidation witnessed since 2020 is likely to continue supporting bottom-line growth. Thus, while the Federal Reserve has signaled rate cuts in 2024, the current high interest rate environment is expected to continue to support margins to an extent in the near term. Yet, higher 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 Bright 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 #16, which places it at the top 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 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 robust 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. The industry’s most recent 2024 earnings estimates have been revised 0.8% higher since the end of April 2023.

Thus, we present a few stocks from the industry that you may want to add to your portfolio now. But before that, let us check out the industry’s recent stock market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

The Zacks Investment Management industry has outperformed the S&P 500 and its sector in the past two years.

Stocks in the industry have collectively gained 25.1%. The S&P 500 composite has rallied 16% and the Zacks Finance Sector has appreciated 7.6%.

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 2.77X. This compares with the highest level of 5.74X, the lowest level of 2.14X and the median of 3.68X 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 11.16X, 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 4.12X 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 Consider

BlackRock: The New York, NY-based Zacks Rank #1 (Strong Buy) company is the largest asset manager (by assets) in the United States, with a market capitalization of $117 billion. The company’s broad product diversification, its revenue mix and steadily improving AUM balance have been aiding the top line. As of Dec 31, 2023, BlackRock had total AUM of $10 trillion.

Over the last five years (2018-2023), the company’s AUM balance witnessed a compound annual growth rate (CAGR) of 10.9%. Over the same period, its revenues (on a GAAP basis) witnessed a CAGR of 4.7%. Given its efforts to strengthen the iShares and exchange-traded funds (ETF) operations, and increased focus on the active equity business, BLK’s top line is expected to continue to be positively impacted.

Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. Recently, the company announced plans to acquire the remaining 75% stake in SpiderRock (this will enhance separately managed accounts offerings). In January 2024, BLK agreed to acquire Global Infrastructure Partners, which will strengthen its position as the global credit asset manager.

In August 2023, the company closed the acquisition of London-based Kreos Capital. 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.

Over the past six months, shares of BlackRock have gained 25.2%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2024 earnings has been revised 4.2% higher to $41.32 per share.

Price and Consensus: BLK

SEI Investments: Headquartered in Oaks, PA, this asset management company, with a market cap of more than $9 billion, is a leading provider of wealth management business solutions in the financial services industry. As of Dec 31, 2023, it had AUM worth $432 billion and client assets under administration of $942.8 billion.

Though the company’s revenues declined in 2023, the metric witnessed a CAGR of 3.4% over the last five years (ended 2023). Its assets under management, advisement and administration saw a CAGR of 9.7% over the same time frame.

The company’s diversified products and revenue mix, strong global presence, solid AUM balance and strategic acquisitions reflect improving prospects. In December 2023, it acquired Altigo to expand in the alternatives investment space. In November 2023, the company acquired National Pensions Trust, which will likely enhance its position in the defined contribution market.

Notably, technology is the backbone of SEI Investments’ businesses. The company’s primary business platform — Investment Processing — delivers its outsourced software and processing services through TRUST 3000 and the SEI Wealth Platform (“SWP”). SEIC’s 2021 strategic acquisitions, including Oranj's cloud-native technology platform, Finomial and Novus, support its technological advancement efforts.

The company launched two key technology enhancements through the SWP — Digital Account Open and Digital Model Management, which are available to independent advisors. In 2022, SEIC launched SEI Data Cloud through a strategic partnership with Snowflake to address the financial services industry’s demand for more advanced data integration. These initiatives and constant innovations in software will likely help SEI Investments win clients and continue to support top-line growth.

Recently, the company has invested $10 million in TIFIN, a leading force in AI-driven wealth management innovation. The partnership is poised to reshape the landscape of wealth management through rapid exploration, market innovation access and talent development.

Over the past six months, SEIC shares have gained 22%. Over the past 60 days, the Zacks Consensus Estimate for the company’s 2024 earnings has been revised 3.8% upward to $4.07 per share. SEIC currently flaunts a Zacks Rank #1.

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

Price and Consensus: SEIC

Affiliated Managers: Headquartered in Massachusetts, this is a global asset manager with equity investments in a large group of investment management firms or affiliates. The company manages more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, alternative and fixed-income products. The company has a market cap of more than $5 billion. As of Dec 31, 2023, it had total AUM worth $672.7 billion.

Though AMG’s consolidated revenues declined in 2023 and 2022, owing to lower asset-based fees and performance-based fees, the metric witnessed a three-year (ended 2023) CAGR of almost 1%. Its portfolio of investment products provides a competitive edge when it comes to fulfilling the diverse needs of clients.

Moreover, with its strong balance sheet and liquidity position, the company has considerable capability to invest in other companies and generate meaningful growth through new investments. In 2023, it significantly diversified its business “in distinct fast-growing areas of private markets” by taking minority interests in Ara Partners and Forbion Group Holding B.V., through which, it is re-shaping its business profile, with a focus on alternatives.

In the last two years, divestitures of stakes in Veritable LP and Baring Private Equity Asia significantly bolstered AMG’s balance sheet position. The company is targeting investments in alternatives, given the strong investor preference for the same.

AMG shares have gained 32.6% over the past six months. Over the past 60 days, the Zacks Consensus Estimate for its 2024 earnings has been revised 4% higher to $22.03 per share. The company currently carries a Zacks Rank #2 (Buy).

Price and Consensus: AMG

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