Greggory Warren: Given the cyclical and secular headwinds the U.S.-based asset managers are facing, we've taken a much harder look at the moat sources, economic moats, and moat trends of the companies we cover.
At this point, we believe that only two of the U.S.-based asset managers--BlackRock and T. Rowe Price--have wide economic moats, as they not only have the ability to differentiate themselves from the competition with low-cost fund offerings and repeatable investment strategies but have demonstrated a willingness and an ability to prudently adapt to the changing competitive environment.
For the narrow-moat firms that remain, we expect them to struggle over the next five to 10 years, but still outearn their cost of capital over the next decade.
As for the no-moat firms, we expect these companies to struggle to consistently earn excess returns, as limitations in their product mix, fee structures, and/or abilities to adapt to a changing competitive environment impact their competitive positioning.
While some of the firms we cover are currently trading at multiples not seen since the financial crisis, we recommend long-term investors focus on quality over price by sticking with BlackRock and T. Rowe Price, which have generated solid organic growth and higher operating margins than their peers, the two main things investors have been willing to reward in the past.
We believe BlackRock, which is more of a bet on passive investing, will continue to thrive in a more selective product environment. Organic growth will primarily be driven by the company's iShares platform, and unlike most of the other U.S.-based asset managers, BlackRock should see a slight expansion in operating margins over the next five to 10 years, driven by the increased scale of its ETF business and efficiencies created by technology investments.
As for T. Rowe Price, which is more of a bet on active investing, the firm's above-average investment performance is a huge advantage. While organic growth will be challenged by the ongoing baby boomer retirement phase, we see the firm picking up business in the retail-advised channel the next five to 10 years. The firm should also see less fee and margin compression than its peers given the better fee and performance positioning of its funds.