The Zacks Investment Management industry continues to bear the brunt of lower interest rates and elevated technology-related costs. While the rate hike expectations will support investment managers’ margin growth, revenues might not improve significantly in the near term.
Since the coronavirus outbreak, investment managers have benefited from higher volatility and client activity. Although markets began to normalize a little from second-half 2021, client activity remains decent, driving asset inflows. Thus, investment managers like Ameriprise Financial, Inc. AMP, Affiliated Managers Group, Inc. AMG, BrightSphere Investment Group Inc. BSIG and Silvercrest Asset Management Group Inc. SAMG should benefit from rising assets under management (AUM).
About the Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals. These companies 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 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 for managing their assets, helps reduce the impact of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Watch
Shift in Preferences, Relatively Low Rates to Keep Near-Term Margins Under Pressure: While the rise in industry consolidation witnessed since the beginning of 2020 is likely to support investment managers’ profits, relatively lower interest rates will likely keep hurting margin growth to some extent. Also, given the continued need for low-cost investment strategies, the demand for passive investing is expected to keep increasing, similar to the past few years. Thus, relatively lower rates (despite the rate hike in mid-March and beginning of May 2022 and expectations of several more hikes this year) and rising demand for passive investments will continue to keep margins under pressure at least in the near term.
Rising Costs are Concerning: The tightening of regulations to increase transparency has led to a rise in compliance costs for investment managers. Also, as wealth managers are constantly trying to upgrade technology to keep up with the evolving customer needs, technology costs are expected to rise. These will likely lead to an increase in overall expenses.
Net Inflows to Continue to Aid AUM Growth: In 2020 and the first half of 2021, there was a significant rise in equity market volatility and solid client activity, owing to the coronavirus-induced uncertainty, which aided total AUM growth. During the second half of 2021, markets began to normalize, with client activity remaining decent. The first couple of months of 2022 witnessed an unexpected rise in volatility and relatively higher client activity, resulting in asset inflows for majority of the industry players. Thus, driven by rising inflows, growth in AUM is expected to continue in the near term. Asset managers’ top lines are, therefore, expected to improve, supported by higher performance fees and investment advisory fees, which constitute the majority of their revenues.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 44-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #46, which places it at the bottom 10% 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 underperformance 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 bottom 50% of the Zacks-ranked industries is a result of bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s bottom-line growth potential. The industry’s current-year earnings estimates have been revised 16.9% lower since May 2021-end.
Despite the near-term challenges, we present a few stocks that you may want to keep an eye on. But before that, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Investment Management industry has underperformed both the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 25.6%. The S&P 500 composite has rallied 48.6% and the Zacks Finance Sector has appreciated 49.2%.
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 3.92X. This compares with the highest level of 5.30X, the lowest level of 2.02X and median of 3.54X over the past five years. Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 14.79X, 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 4.34X for the same period is above the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
4 Investment Management Stocks to Keep an Eye On
Ameriprise: Headquartered in Minneapolis, MN, this Zacks Rank #3 (Hold) company, with a market capitalization of $29.9 billion, operates a well-diversified portfolio than its industry peers. AMP constantly modifies its product and service-offering capacity to keep pace with the dynamic market needs. The strategy has helped it witness a rise in total net revenues. The company’s GAAP revenues have witnessed a compound annual growth rate (CAGR) of 2.6% over the six-year period between 2016 and 2021.
AMP’s efforts to launch products are likely to keep supporting top-line growth. Its revenue mix and inorganic expansion efforts have been aiding AUM growth. As of Mar 31, 2022, Ameriprise had total AUM and assets under administration worth $1.34 trillion.
Moreover, with an aim to remain profitable, Ameriprise restructures its business from time to time through divestitures and spin-offs. In 2019, it divested the Ameriprise Auto & Home business. AMP also plans to offer a range of banking and credit products through its federal savings bank — Ameriprise Bank — to its wealth management clients. While persistently rising expenses, owing to technology upgrades, will likely hurt the bottom line to some extent, the acquisition of BMO Financial Group’s EMEA asset management operations in November 2021 is expected to be accretive to earnings.
In the past year, shares of Ameriprise have gained 7.6%. Over the past 30 days, the Zacks Consensus Estimate for the company’s 2022 earnings has been revised 1.7% lower, while earnings estimates for 2023 have been revised 3% higher.
Price and Consensus: AMP
Affiliated Managers: Headquartered in Massachusetts, Affiliated Managers has equity investments in a large group of investment management firms or affiliates. The affiliates manage more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, and alternative and fixed-income products. The company has a market cap of $5.1 billion.
As of Mar 31, 2022, this Zacks Rank #3 company had total AUM of $776.7 billion. It is expected to continue generating meaningful growth through new investments. Its successful partnerships and focus on strengthening the retail market operations will likely keep aiding profits. The acquisitions of majority stakes in Parnassus Investments and Abacus Capital Group, along with the buyouts of minority stakes in OCP Asia, Boston Common Asset Management and Systematica, are steps in this direction.
While Affiliated Managers’ affiliates have been witnessing overall net outflows over the past few years, the company’s differentiated product categories are likely to support cash flows across channels.
AMG has depreciated 22.3% over the past 12 months. The Zacks Consensus Estimate for its 2022 earnings has been revised lower by 2.4%. Likewise, earnings estimates for 2023 have been revised downward by 5.1%.
Price and Consensus: AMG
BrightSphere: Based in Boston, MA, BrightSphere is a global, diversified asset management company with a market cap of $841.4 million. As of Dec 31, 2021, the company had $117.2 billion of AUM. BSIG provides investment management services globally, predominantly to institutional investors. The company currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BrightSphere held ownership interests in a group of affiliates. However, now, it operates through one affiliate, Acadian Asset Management LLC, within its Quant & Solutions segment. The Quant & Solutions segment comprises versatile, highly-tailored strategies that leverage data and technology in a computational, factor-based investment process across a range of asset classes in developed and emerging markets.
Over the past year, shares of BrightSphere have lost 10.6%. Over the past 30 days, the Zacks Consensus Estimate for its current-year and next-year earnings has been revised upward by 4.8% and 1%, respectively.
Price and Consensus: BSIG
Silvercrest: Headquartered in New York, NY, Silvercrest provides investment management and family office services to individuals and families and their trusts, and endowments, foundations and other institutional investors primarily located in the United States. SAMG manages funds of funds and other investment funds, collectively referred to as the Silvercrest Funds.
The company offers a full suite of complementary and customized family office services for families seeking comprehensive oversight of their financial affairs. As of Dec 31, 2021, SAMG’s AUM balance stood at $32.3 billion.
With a Zacks Rank of 2 and a market cap of $306 million, the company’s organic growth trajectory remains impressive. Over the past five years (2017-2021), its revenues witnessed a CAGR of 9.6%.
Since the inception, the company’s organic growth has been complemented by selective hiring and strategic acquisitions, which have served to enlarge client base, expand professional ranks, increase geographic presence and broaden service capabilities. SAMG continues to recruit and hire senior portfolio managers with significant client relationships as well as successful investment professionals with capabilities currently not available internally.
Over the past year, shares of Silvercrest have gained 47.4%. The Zacks Consensus Estimate for its 2022 earnings has been revised upward by 1.1%. Likewise, earnings estimates for 2023 have been revised up by 1.9%.
Price and Consensus: SAMG
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