BlackRock Our Top Pick in a Tough Year
U.S. asset managers' valuations are depressed, but we see some opportunity.
It’s been a difficult year for the U.S.-based asset managers, with the 12 companies we cover down close to 20% on average since the start of 2018, compared with a nearly 8% price gain for the S&P 500 index. While valuations have become depressed across the group, they’ve also bifurcated between perceived “haves”--wide-moat-rated BlackRock (BLK) and T. Rowe Price (TROW) and narrow-moat-rated Eaton Vance (EV) and Cohen & Steers (CNS)--which are generating above-average rates of organic growth and operating margins (and trading at 25%-plus premiums to the group on a price/earnings basis), and those viewed as “have nots”--narrow-moat-rated Invesco (IVZ), Affiliated Managers Group (AMG), Franklin Resources (BEN), Legg Mason (LM), and Janus Henderson (JHG) and no-moat Waddell & Reed (WDR)--some of which deserve to be trading at steep discounts (of more than 25%) to the group.
We think the industry itself is at a bit of a crossroads, with a handful of different forces--including increased regulation of asset and wealth management globally, distribution channel disruption on the retail-advised side of the business in the United States and other developed markets, the ongoing shift from active to passive products, and a greater focus on relative and absolute fund investment performance and fees--having an impact on asset manager fees and expenses, which is working against the ability of these companies to generate sustainable levels of organic growth and increase profitability. Given this environment, we still recommend that long-term investors focus on BlackRock, the leading provider of exchange-traded funds, with two thirds of managed assets and half of revenue coming from passive products, as well as garnering more than 80% of its assets under management from institutional clients, and T. Rowe Price, which has the best and most consistent active investment performance in the group (and is a leader in the industry as a whole) and derives two thirds of its assets under management from retirement-based products.
Greggory Warren, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.