Greggory Warren: With earnings season basically over for asset managers, we think there are two key themes worth focusing on as we move forward.
First and foremost is the growth of ETFs, an industry that had $2.7 trillion globally in assets under management at the end of last month. While most of the asset managers in our coverage [universe] have been able to brush off the growth of the ETF industry, as their own asset levels have more than doubled since the dark days of the financial crisis, it will be difficult to ignore much longer.
Only two companies we cover--BlackRock (BLK) and Invesco (IVZ)--have large-scale ETF operations. And BlackRock is the only one, in our view, that can hold its own in the face of [the rapid growth of] Vanguard's ETF operations. We expect the ETF industry to continue to drive high-single-digit to double-digit rates of organic growth for providers--something that has been lacking for most active managers.
The second thing worth watching is the continuation of the risk-aversion cycle that we feel the industry has been caught up in since the financial crisis. This is a situation where investors are willing to increase their risk appetites during stable and expanding markets only to pull back dramatically during market declines.
With volatility increasing in the global-equity markets, we remain cautious on the equity-heavy names on our coverage [list], especially those that have had weak fund performance and have had to depend more on market gains to generate growth. Both Janus Capital Group (JNS) and Waddell & Reed (WDR) fit that mold.
We also expect organic growth and overall market gains to be much harder to come by in a rising-interest-rate environment--which is bad news for firms with a greater concentration in fixed income, like Legg Mason (LM), AllianceBernstein (AB), and Franklin Resources (BEN).
Overall, we continue to encourage investors to focus on the better-run and more-diversified asset managers--like BlackRock and Invesco. Both firms have solid equity and fixed-income operations that can adjust to changing market cycles, and both firms can offer active and passive strategies to investors.