The soaring market boosts the wealth of asset managers

The upward trend in earnings growth and strong investor inflows are welcome changes for many US asset management companies, although this is seen as a temporary relief of strategic challenges.

It is expected that US market managers will increase their revenue for the entire calendar year for the first time in four years. The soaring stock market valuation boosted the assets under management of the entire industry. For example, BlackRock reported that as of the end of March, its assets under management reached a record $9 billion, an increase of 39% from the $6.45 billion in the previous 12 months.

Under the leadership of Invesco, Ameriprise Financial and Franklin Resources, the stock price of the industry rose rapidly in 2021 and outperformed the market.

Morgan Stanley analyst Michael Cyprys said: “Many asset management companies are cheap stocks and are considered valuable stocks. The transaction price is EBITDA. “The liquidity and performance of actively managed funds are better, and we have seen improvements in operating margins and earnings. ”

Credit Suisse analyst Craig Siegenthaler said: “Due to the appreciation of the market, the number of assets under management in the industry has increased significantly. Retail investors have been catching up with the market and putting more money into funds. “The stock market cannot continue to rise at this rate, so in the next two quarters, capital flows will slow.”

Any slowdown in traffic and instability in market performance will shift attention to the long-term challenges facing the industry. Intense fee pressure and poor competitive pressure, as well as the increasing number of passive exchange-traded products, have stimulated endless industry consolidation.

Invesco Bank acquired Oppenheimer Funds in 2018. Last year, Morgan Stanley unexpectedly acquired Eaton Vance, focusing on expanding its business scope and providing more services to customers in one place. This field is facing cost pressures from technology investment, expansion to exchange-traded funds and private markets.

Invesco Group President and CEO Marty Flanagan (Marty Flanagan) conveyed a kind of industry vigilance, after the asset management company with assets of 1.4 billion US dollars last month achieved strong first-quarter earnings and A long-term net inflow of US$24.5 billion. Flanagan said on the earnings call with analysts: “I don’t think the strategic dynamics have changed.” “Customers have higher expectations of their asset managers, and you need to expand in all areas of the organization.”

Transaction records are mixed, and cost savings are easier to achieve than preventing capital outflows.

Cyprys said: “Better deals include adding new products or customer groups to your distribution network.” “In this industry, what matters is traffic, the inflow of new funds.”

A tailwind for the industry is that China has begun to approve licenses for Western wealth and fund managers, which may change the inflow of customers.

However, the direction of travel is still focused on exchange-traded funds. According to CFRA data, investors have injected another US$269 billion into ETFs so far in 2021, following a record of US$503 billion flowing into US ETFs last year. Wisdom Tree is a beneficiary of the ETF boom and is widely regarded as an attractive target for large asset management companies.

Jarrett Lilien, President and Chief Operating Officer of Wisdom Tree, told the Financial Times: “The macro trend of mutual funds losing to ETFs and wealth management companies turning to model portfolios means that we can benefit from others and grab market share. “He said: “Our core business is booming, we are expanding.” He admitted that “we are aware of our attractiveness.”

The long-term unfavorable factors facing the industry explain the large valuation gap between asset management companies and the market as a whole. Despite the strong increase in stock prices, the industry’s earnings per share forecast for the next 12 months is still at a low 13.2 times, lower than the S&P 500’s 22.2 times expectation.

KBW said that the strong one-year revenue growth of traditional asset management companies will lead to an average revenue growth of close to 20% this year, which “will fall to a healthy level of 9% by 2022.”

KBW analyst Rob Lee said: “Under the long-term historical background, the valuation is still cheap, but considering the concerns about long-term growth, the valuation should be reasonable.” Affiliated to the manager group, Invesco Franklin’s strong performance “highlights that investors will respond to signs of improving business performance”, especially in the following situations [asset managers’] Lee said: “Stocks are getting rid of low valuations.”

However, according to Credit Suisse, differences between asset managers are emerging, as highlighted by their respective growth rates. Based on net flows and assets under management, the industry’s long-term organic growth rate has recovered since the beginning of last year, with BlackRock and Invesco as the heads, but AMG, Franklin Resources and T Rowe Price lag behind their peers.

Cyprys said: “Long-term challenges remain, and the structural pressure in the industry is to shift to lower fees and capital flows to mutual fund tools.”