With U.S. equity markets declining around 4% last week, U.S.-based asset managers have given back much of the strong gains they've seen since the start of the year. We've always noted that the best time to buy asset managers is during market sell-offs, given that the group (which traded down 7% last week) tends to go down 1.5-2.0 times the market decline, with investors generally seeing more attractive entry points for our top two long-term ideas: wide-moat-rated BlackRock (BLK) and T. Rowe Price (TROW). That said, these two names rarely get cheap, which is why we've also encouraged investors to look at some of the second-tier names in the group--wide-moat Eaton Vance, narrow-moat Invesco (IVZ) and Cohen & Steers (CNS), and no-moat Affiliated Managers Group (AMG)--which can trade down much harder during market sell-offs, offering investors wider margins of safety than they're likely to see with BlackRock and T. Rowe Price.
Generating the highest operating margins among the U.S.-based asset managers we cover and tending to produce above-average levels of organic growth, BlackRock and T. Rowe Price have generally traded at a 10%-plus premium to the group, and are currently trading at 43% and 14% respective premiums. The two firms are also trading at less than 10% discounts to our fair value estimates, making them less approachable right now. The same could be said for Eaton Vance, trading at a 30% premium to the group and only a 5% discount to our fair value estimate. While Cohen & Steers, AMG, and Invesco are all trading at greater than 12% discounts to our fair value estimates, Invesco, at 11.6 and 10.4 times consensus earnings estimates for 2018 and 2019, respectively (compared with Cohen & Steers at 15.3 and 14.2 times and AMG at 11.1 and 10.1 times), along with a solid organic growth profile (generating a 1.8% CAGR for organic growth during 2013-17 with one of the lowest standard deviations in the group), is the more attractive option at today's prices.
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Greggory Warren, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.