Brexit Fears Make Invesco More Attractive
We think the market overestimates the effect on this asset manager.
We believe that the market is overestimating the impact of Brexit on Invesco’s (IVZ) assets under management, revenue, and profitability, and we think the current stock price presents an attractive investment opportunity. There will surely be market losses, redemptions, and currency losses as a result of the vote by the United Kingdom to exit the European Union, given that Invesco sources 13% of its managed assets from the U.K. and another 10% from continental Europe and will feel the impact of increased market volatility in its U.S.- and Canada-based funds that invest in the region. However, the effect is nowhere near the level that the market seems to be insinuating in the current stock price, which infers a loss of basically all of the U.K.-derived AUM of $99 billion that Invesco had on hand at the end of the first quarter of 2016.
While Invesco reported at the end of last year that a 10% decline in the pound would lower its margins by 50 basis points and shave 5%-6% from annual earnings, it has also hedged its currency risk at exchange rates below $1.43 per GBP 1 through the first quarter of next year. We expect the market losses and outflows associated with Brexit, while meaningful in the near term, to be less onerous than the market seems to be implying. As a result, we see the firm closing out 2016 with $715 billion-$755 billion in managed assets (down from our previous estimate of $765 billion-$825 billion), which would leave full-year average AUM down by midsingle digits and total revenue down 10%, due to product mix shifts and the loss of higher fee-generating assets in the European theater. This contrasts with our previous forecast for a low- to mid-single-digit decline in Invesco’s top line during 2016.
Greggory Warren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.