Asset-management stocks have been hit hard this year in the market selloff, with some down 35% to 45%, almost double the decline in the S&P 500 index. No industry is more directly tied to stock and bond markets, and a bear market depresses assets under management, revenue, and earnings. Profit estimates for 2022 lately have been declining, and earnings are on track to fall below last year’s results.
Yet, even against this deteriorating backdrop, the stocks look appealing. Many asset managers’ shares are trading for 10 times projected 2022 earnings or less, and yield 3% to 5%. Most companies have strong balance sheets, and dividends generally look secure. The group offers a play on a recovery in the stock market and the long-term investment and retirement needs of the big millennial generation, whose oldest members are about 40.
These traditional managers trade for lower valuations than the higher-growth, higher-fee alternatives specialists such as Blackstone (BX).
“A lot of these stocks are extremely cheap versus our fair-value estimates,” says Greggory Warren, a Morningstar analyst. He favors industry leader BlackRock as well as T. Rowe Price.
BlackRock runs $9.6 trillion and has the top exchange-traded fund platform in iShares. As Warren notes, investors reward asset managers for organic growth in assets under management and margins.
“BlackRock stands out ahead of everybody because it is riding the secular shift into passive investments,” he says. “Between its index-based and ETF businesses, it is generating 3% to 5% organic annual growth in assets under management, when most everyone else has been struggling to generate positive organic growth.”
BlackRock’s flows into long-term strategies ran at a 5% annual rate in the first quarter. The company also has 40%-plus operating profit margins.
BlackRock’s shares, which trade around $585, are back where they stood in early 2018, when the company’s assets under management were $6 trillion. The stock trades for 15 times projected 2022 earnings and yields 3.3%. Warren puts fair value at $880 a share.
“BlackRock continues to widen the moat,” says CFRA analyst Cathy Seifert. She points to the company’s technology initiatives, such as Aladdin, a portfolio-management system that is gaining traction in the investment industry.
Traditional asset managers are trading well below historical valuations, and sport hefty yields. Industry demand should grow as the millennial generation saves for retirement.
|Company / Ticker||Recent Price||YTD Change||Market Value (bil)||2022E EPS||2022E P/E||Dividend Yield||AUM (bil)|
|AllianceBernstein Holding / AB||$40.39||-17.3%||$4.0*||$3.27||12.3||9.9%||$735|
|BlackRock / BLK||585.77||-36.0||88.7||38.42||15.2||3.3||9,570|
|Franklin Resources / BEN||23.15||-30.9||11.6||3.59||6.5||5.0||1,478|
|Invesco / IVZ||15.97||-30.6||7.3||2.47||6.5||4.7||1,556|
|T. Rowe Price Group / TROW||106.09||-46.1||24.1||10.07||10.5||4.5||1,552|
*Reflects 35% stake owned by AB that is publicly traded. E=estimate. AUM=assets under management
T. Rowe Price has taken one of the biggest hits in the sector, with its shares down 46%, to $106. The former investor favorite has had outflows, and the performance of its growth-oriented mutual funds has been dismal this year. One of its flagship funds, T. Rowe Price New Horizons (PRNHX), is down 40% this year.
The firm has one of the best franchises among traditional managers, however, with the No. 3 position in target-date funds behind Fidelity and Vanguard, and historically strong fund performance. It has an impressive record of delivering for shareholders, with 17% annualized growth in earnings and dividends over the past 30 years. It now trades cheaply at 10.5 times projected 2022 earnings, and yields 4.5%.
T. Rowe Price also has one of the industry’s best balance sheets, with $3.5 billion, or $16 a share, of net cash and fund investments.
“Among active managers, it’s best-of-breed,” says Warren. “The current multiple of 10 to 11 times is unheard of for T. Rowe.” Warren has a fair value of $155 for T. Rowe’s shares.
The stock historically has traded for 15 times forward earnings.
AllianceBernstein, 65%-owned by insurer Equitable Holdings (EQH), has been a below-the-radar success story, with steady inflows. Its partnership units, at about $40, have held up better than the asset-management group this year. The company’s asset mix is roughly 45% stocks, 40% bonds, and 15% alternatives and other investments. It also has an attractive retail brokerage business geared to high-net-worth clients.
Structured as a partnership paying a low, sub-10% tax rate, the company doesn’t have a fixed payout. Instead, it pays out virtually all of its profits in distributions, and now yields about 10% based on trailing 12-month payments.
Invesco has a broadly diversified business, including active and passive vehicles, with $1.6 trillion of assets under management and one of the better inflow stories in the group. Its best business is ETFs, led by the $150 billion Invesco QQQ Trust (QQQ). Invesco is No. 4 behind iShares, Vanguard, and State Street (STT) in ETF assets. The stock, at about $16, trades for only 6.5 times projected 2022 earnings and yields 4.7%. “Management has worked hard to turn around fund performance, and flow trends have been positive this year,” Seifert says.
To help spur growth, Franklin Resources has made several acquisitions in recent years, highlighted by its $6.5 billion deal for Legg Mason in 2020 that roughly doubled its assets under management.
The company’s stock, at about $23, trades for just six times projected earnings in its September 2022 fiscal year. It yields 5%, and the dividend looks solid, given a payout ratio of under 35%. The low valuation reflects persistent net outflows that the company has sought to address by building up its alternative asset-management business, now totaling more than $200 billion of investments.
With their asset-light business models, investment managers should be able to ride out the market downturn. Their battered stocks offer a good play on an eventual market recovery.
Write to Andrew Bary at firstname.lastname@example.org