This year's market selloff has taken a toll on asset-management shares, with some plummeting 35 percent to 45 percent, roughly double the dip in the S&P 500 SPX index. There is no sector that is more inextricably tied to the stock and bond markets, and a downturn decreases assets under management, revenue, and profitability. Profit predictions for 2022 have just been reduced, and earnings are expected to fall short of last year's results.
Nonetheless, even against this bleak background, the stocks appear tempting. Many asset managers' shares are trading at 10 times or less estimated 2022 profits and yield 3 to 5 percent. Most corporations have solid balance sheets, and dividends appear to be secure. The firm is betting on a stock market rebound as well as the long-term investment and retirement demands of the large millennial generation, the oldest members of whom are about 40. The Best Players: BlackRock (BLK), T. Rowe Price Group (TROW), Invesco (IVZ), AllianceBernstein Holding (AB), and Franklin Resources (BEN). are among the most prominent publicly listed asset managers.
These conventional managers are valued lower than higher-growth, higher-fee alternatives experts like Blackstone (BX).
"A number of these equities are extraordinarily cheap relative to our fair-value assessments," says Morningstar analyst Greggory Warren. He prefers industry leader BlackRock and T. Rowe Price.
BlackRock manages $9.6 trillion in assets and is the market leader in exchange-traded funds through iShares. According to Warren, asset managers are rewarded by investors for organic growth in assets under management and margins.
"BlackRock stands out because it is following the long-term trend toward passive investing," he says. "It is producing 3% to 5% organic yearly growth in assets under management across its index-based and ETF businesses, at a time when virtually everyone else is failing to create positive organic growth."
In the first quarter, BlackRock's investments in long-term strategies increased at a 5% annual pace. The corporation also boasts operational profit margins of 40% or higher.
BlackRock's shares, which are currently trading at $585, have returned to where they were in early 2018, when the company's assets under management were $6 trillion. The stock is currently trading at 15 times estimated 2022 profits and yields 3.3 percent. Warren estimates a fair value of $880 per share.
CFRA analyst Cathy Seifert says, "BlackRock continues to extend the moat." She cites the company's technological innovations, such as Aladdin, a portfolio-management system which is gaining popularity in the investing business.
Traditional asset managers are selling at significant discounts to historical values and offer attractive dividends. As the millennial generation saves for retirement, industry demand should rise.
T. Rowe Price has suffered one of the greatest losses in the industry, with its shares falling 46% to $106. The previous investor favorite has seen withdrawals, and its growth-oriented mutual funds have performed poorly this year. T. Rowe Price New Horizons (PRNHX), one of its flagship funds, has dropped 40% this year.
However, the business has one of the greatest franchises among conventional managers, ranking third in target-date funds behind Fidelity and Vanguard, and has historically outstanding fund performance. It has a remarkable track record of providing for shareholders, with annualized profits and dividend growth of 17 percent over the last 30 years. It is currently trading at 10.5 times estimated 2022 profits and yields 4.5 percent.
T. Rowe Price also boasts one of the greatest balance sheets in the business, with $3.5 billion in net cash and fund investments, or $16 per share.
"It's best-of-breed among active managers," Warren adds. "T. Rowe's current multiple of 10 to 11 times is unprecedented." T. Rowe's shares have a fair worth of $155 according to Warren. Historically, the stock has traded at 15 times anticipated earnings.
AllianceBernstein, which is 65 percent controlled by insurer Equitable Holdings (EQH), has been a quiet success story with consistent inflows. This year, its partnership units, which cost around $40, have outperformed the asset-management company. The asset mix of the corporation is around 45 percent equities, 40 percent bonds, and 15 percent alternatives and other assets. It also has an appealing retail brokerage business aimed at high-net-worth clientele.
The corporation is structured as a partnership with a low, sub-10 percent tax rate and no predetermined dividend. Instead, it distributes almost all of its income, and it presently yields around 10% based on trailing 12-month payments.
With $1.6 trillion in assets under management and one of the best inflow stories in the group, Invesco has a broadly diversified business that includes active and passive vehicles. Its most profitable business is ETFs, which are led by the $150 billion Invesco QQQ Trust (QQQ). In terms of ETF assets, Invesco ranks fourth after iShares, Vanguard, and State Street (STT). At around $16, the company trades for barely 6.5 times estimated 2022 earnings and yields 4.7 percent. "Management has worked hard to improve fund performance this year, and flow patterns have been favorable," Seifert adds.
Franklin Resources has undertaken multiple acquisitions in recent years to assist drive development, most notably its $6.5 billion buy for Legg Mason in 2020, which nearly tripled its assets under management.
At around $23, the company's stock trades for only six times predicted earnings in the fiscal year ending September 2022. It yields 5% and the dividend appears to be solid, considering a payout ratio of less than 35%. The low valuation reflects chronic net withdrawals, which the corporation has attempted to address by expanding its alternative asset management division, which currently has over $200 billion in investments.
Investment managers should be able to weather the market collapse thanks to their asset-light business strategies. Their shattered stocks are a smart bet on if the market rebound.
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