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Why These Asset Managers Are the Only Ones With Wide Moats

Why These Asset Managers Are the Only Ones With Wide Moats

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.

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About the Author

Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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