Diversified Asset Managers Still Hold the Strongest Hand
With the uncertainty that still exists in the markets (and the economy), and investors' overall penchant for risk aversion, we think the more diversified asset managers in our coverage universe remain the best positioned to capitalise on the current environment. That said, we continue to believe it pays to be selective when looking at firms in this category, such as BlackRock, Franklin Resources, Invesco, Legg Mason, and AllianceBernstein.
Legg Mason (LM) (See Our Premium Stock Analysis)
Of these five names, we continue to have concerns about Legg Mason, which has had more trouble than most maintaining its assets under management (AUM). The firm's problems started well in advance of the bear market, as poor relative investment performance at its Western Asset Management division, which accounts for two thirds of Legg Mason's managed assets and is the main source of its fixed-income AUM, started a flood of outflows that has yet to reverse itself. In an environment where record levels of investor capital have flowed into bonds, Legg Mason has been unable to provide fixed-income products that would allow it to successfully attract and retain investors. And lacking the scale in equities it has in fixed income, the firm is also unlikely to garner enough inflows from its stock offerings to cover losses from its bond funds once investor sentiment does start to shift from fixed income to equities.
AllianceBernstein (AB) (See Our Premium St0ck Analysis)
AllianceBernstein is another one of our well-diversified asset managers that has struggled with outflows during much of the last two years. Much like Legg Mason, the firm has seen a significant level of outflows from its institutional client base, with the main difference being that AllianceBernstein's equity offerings have taken the hit. While relative fund performance has been improving, it is still poor during the last three- and five-year time frames, which are important benchmarks for most institutional investors. Since the equity markets bottomed in March 2009, AllianceBernstein has seen close to $140 billion in outflows from its equity operations, with most of the redemptions driven by institutional investors. Lacking the level of equity performance it needs to not only attract new investors but hold on to those it already has, AllianceBernstein has had to rely on market appreciation (which can be volatile) and an expansion of its fixed-income business (which generates lower fees than its equity operations) to maintain its AUM.
Our Top Three Picks in the Asset Management Industry
With the market struggling to eke out a gain this year, and bond funds continuing to generate a much higher degree of interest than stock funds from investors, we continue to believe that the more broadly diversified asset managers with solid equity and fixed-income franchises will generate more consistent inflows. Firms that can provide access to ETFs or have a fair amount of international business in their portfolios get an added boost. As always, we believe that companies with some relative stickiness in their asset base (whether through a diversified product offering or a niche that allows them to hold on to assets for longer periods of time) will outperform in the long run, especially if they're capable of generating new business. While less diversified niche managers like T. Rowe Price (TROW) and Eaton Vance (EV) normally would fit this bill, we think the following three managers are far more attractive, not only from a product diversity perspective but on a price/fair value (P/FV) and price/earnings (P/E) basis:
Invesco (IVZ) (See Our Premium Stock Analysis)
Trading at 29% discount to our $32 fair value estimate, and 12.7 times this year's (and 10.8 times next year's) consensus earnings per share estimate, Invesco is currently one of the cheapest asset managers on our list. With a product portfolio that is fairly diverse by asset class, distribution channel, and geography, and a stronger ability than most of our asset managers to generate organic growth in the near term, we feel that the market has mispriced Invesco's shares. One year into its integration of Van Kampen, management has been working hard to deepen its relationship with clients and consultants. Once that is complete, we expect the firm to be a far more formidable competitor domestically, with the size and scale necessary to secure placement on a wide array of platforms. With Invesco strong in the defined contribution and defined benefit channels and Van Kampen strong in the broker/dealer channel, the company also can work toward cross-selling the best products from each of its fund families as well as expand its PowerShares ETF operations. The firm also should benefit from the geographic reach of its operations, which includes a meaningful presence in several of the fastest-growing and most attractive markets in the world. Given the cross-selling opportunities created by the Van Kampen deal, and the fact that Invesco's legacy operations are now firing on all cylinders, we believe that the firm is well-positioned to generate solid results regardless of the market conditions.
BlackRock (BLK) (See Our Premium Stock Analysis)
Trading at 24% discount to our $248 fair value estimate, and 14.6 times this year's (and 12.7 times next year's) consensus EPS estimate, BlackRock is not as much of a bargain as Invesco, but is still attractively priced. We continue to believe that BlackRock has the widest moat in the asset management industry. Besides being the largest asset manager in the world, with more than $3.5 trillion in AUM, the firm's diverse product portfolio and ability to offer both active and passive investment strategies gives it a huge leg up on competitors. BlackRock's ownership of iShares, the leading provider of ETFs, leaves it with not only a strong growth vehicle but a tool for building out its presence in the retail channel. With a significant portion of AUM sourced from institutional clients, BlackRock also has one of the stickiest asset bases in the industry. The firm is also more geographically diverse, with clients in more than 100 countries and close to 40% of its AUM coming from investors outside of the U.S. and Canada. We expect cross-selling opportunities within BlackRock's traditional base of institutional clients, which have shown a growing interest in passive investments, and efforts to expand the firm's reach into the retail channel, to drive solid near-term growth. With much more stable cash flows than many of its peers, we feel BlackRock should be able to continuously reinvest in its business, making it all that much harder for some of its smaller competitors to keep pace.
Franklin Resources (BEN) (See Our Premium Stock Analysis)
Trading at 19% discount to our $156 fair value estimate, and 14.2 times this year's (and 12.9 times next year's) consensus EPS estimate, Franklin also is not as much of a bargain as Invesco. With more than $735 billion in managed assets, though, the firm is one of the larger global asset managers. It also has been the poster child for how well diversification can work in an asset manager's portfolio. While Franklin traditionally has been more equity-heavy, the dramatic shift in investor risk appetite during the last several years has left it with a more balanced portfolio. Franklin also has been one of the better internal growth stories in our coverage universe, generating a significant amount of inflows through its fixed-income division during the last two years (which has led to an average quarterly rate of organic growth of around 3%). While we expect the firm to see outflows from its bond fund offerings once interest rates rise and risk appetite increases, we think that Franklin is perfectly placed on the equity side of the business (especially with its global/international funds) to capitalise on any shift in investor sentiment. With solid investment performance across both its fixed-income and equity divisions, we continue to believe that Franklin is one of our better-positioned asset managers.
