Company Reports

All the US-based asset managers we cover have reported their December-quarter earnings, and in some cases revealed assets under management, or AUM, data for January 2024. We now have a better sense of how recent market activity has been affecting results. In our third-quarter earnings wrap, we had assumed that the malaise that had crept into the markets during August-October 2023 might continue through the rest of the year.

We've increased our fair value estimate for narrow-moat-rated Affiliated Managers Group to $168 per share from $152 to account for revised near-term expectations for assets under management revenue, and profitability since our last update. With the US equity markets rising 12% in the fourth quarter of 2023, and the credit markets also rising 7%, AMG reported a 6% increase in its AUM during the period. This left the firm in a better position than we had been expecting coming into 2024, allowing us to raise our fair value estimate by 10%.

A confluence of several issues—poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe there will be room for active management, which is hard to do in an environment where an overwhelming majority of the flows are going into index funds and exchange-traded funds, we believe the advantage (when it comes to getting placement on platforms) will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in narrow-moat rated Affiliated Managers Group's fourth-quarter results that would alter our long-term view of the firm, we expect to increase our $152 per share fair value estimate slightly once we've incorporated the results into our valuation. This would leave the company's shares slightly undervalued relative to their Feb. 5 trading price.

While the runup in the equity markets the past several weeks is likely to have a positive impact on assets under management for the U.S.-based asset managers, we don't expect it to have too significant an impact on our fair value estimates, which are based on 10-year forecasts for AUM growth, fee rates, revenue, and profitability. As of the Nov. 29 market close, the traditional U.S.-based asset managers we cover were trading at an average price/fair value multiple of 0.97, making them only slightly undervalued, while the alternative-asset managers we cover were trading at an average price/fair value multiple of 1.09. This is far from the margin of safety we would need to recommend these more volatile names to long-term investors.

With all the U.S.-based asset managers we cover having reported quarterly earnings, and in some cases revealing assets under management data for October, we have a better sense of how the ongoing equity and credit market volatility is affecting results. Due to their lack of organic AUM growth—a product of having large exposure to higher-cost, poorer-performing active equity products in a market where low-cost passive products are preferred—most of the traditional U.S.-based asset managers have become dependent on equity market gains to expand their AUM. In an environment where fees are under pressure and profit margins are being affected by a need to spend more to maintain (if not improve) performance and enhance distribution, a precipitous decline in managed assets, like we saw during 2022, has a large negative impact on revenue and profitability, given the amount of operating leverage inherent in the asset manager business model.

Contrary to our initial expectations following narrow-moat Affiliated Managers Group's release of its third-quarter results, we have lowered our fair value estimate for the firm to $152 per share from $159 (as opposed to $144 per share). AMG closed out the September quarter with $635.8 billion in managed assets, down 2.3% on a year-to-date basis and 1.4% year over year. While year-to-date outflows of $23.1 billion were better than the $9.4 billion quarterly run rate for outflows experienced by AMG during 2020-22, they exceeded that level during the June quarter (with $10.5 billion in outflows) and were on par with that average level of outflows during the third quarter.

A confluence of several issues—poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe there will be room for active management, which is hard to do in an environment where an overwhelming majority of the flows are going into index funds and exchange-traded funds, we believe the advantage (when it comes to getting placement on platforms) will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in narrow-moat Affiliated Managers Group's third-quarter results that would alter our long-term view of the firm, we expect to lower our $159 per share fair value estimate to $144 to account for revised near- and long-term expectations for assets under management, or AUM, revenue, and profitability.

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we've noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

There was little in narrow-moat Affiliated Managers Group's second-quarter results that would alter our long-term view of the firm. We expect to leave our $159 per share fair value estimate in place. We view the shares as being fairly valued right now.

We do not expect to alter our $159 per share fair value estimate for narrow-moat-rated Affiliated Managers Group following news the firm is selling its equity stake in Veritable, which provides wealth advisory services to ultra-high-net-worth individuals and families, to Pathstone Family Office, another advisory firm offering customized investment advice for families, family offices, and foundations and endowments, for $294 million. While AMG will be relinquishing a business with $17 billion in assets under advisement at the end of May 2023, the company's pursuit of wealth management firms over the past decade always seemed to be more of a side project rather than a whole-hearted effort to replicate its boutique asset management model with wealth managers and advisors, with the income from the stakes that AMG did take in advisors and wealth managers reported as equity method earnings.

A confluence of several issues—poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe there will be room for active management, which is hard to do in an environment where an overwhelming majority of the flows are going into index funds and exchange-traded funds, we believe the advantage (when it comes to getting placement on platforms) will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

There was little in narrow-moat Affiliated Managers Group's first-quarter results that would alter our long-term view of the firm. We expect to leave our $145 fair value estimate in place and view the shares as fairly valued.

While there was little in narrow-moat-rated Affiliated Managers Group's fourth-quarter results that would alter our long-term view of the firm, we do expect to raise our fair value estimate 5%-10% to account for higher levels of AUM at the start of 2023 than we had been expecting. AMG closed out December 2022 with $650.8 billion in managed assets, up 1.0% sequentially but down 20.0% year over year. Absent the detraction from the firm's sale of its equity stake in Baring Private Equity Asia, which reduced AUM by $31.6 billion in mid-October, managed assets would have been up 5.9% sequentially and down just 16.1% year over year.

A confluence of several issues--poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel--has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe there will be room for active management, which is hard to do in an environment where an overwhelming majority of the flows are going into index funds and exchange-traded funds, we believe the advantage (when it comes to getting placement on platforms) will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in narrow-moat-rated Affiliated Managers Group's third-quarter results that would alter our long-term view of the firm, we do expect to lower our fair value estimate slightly as equity and credit markets are likely to be weaker in the near term than we had previously projected. We view the shares as being modestly undervalued relative to our revised fair value estimate.

A confluence of several issues--poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel--has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe there will be room for active management, which is hard to do in an environment where an overwhelming majority of the flows are going into index funds and exchange-traded funds, we believe the advantage (when it comes to getting placement on platforms) will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

While there was little in narrow-moat Affiliated Managers Group's second-quarter results that would alter our long-term view of the firm, we expect to lower our fair value estimate slightly to $150 per share from $155 as we incorporate lower levels of assets under management, or AUM, in the near term given market returns during the first half of 2022 and our expectations for the remainder of the year.

While we have lowered our fair value estimate for Affiliated Managers Group to $155 per share from $175, it was due primarily to the incorporation of continued market losses and weaker flows in the face of volatile equity and credit markets in the near term, as opposed to anything being fundamentally wrong with the firm. Our new valuation implies a price/earnings multiple of 8.4 times our 2022 earnings estimate and 7.8 times our 2023 earnings estimate, with the company's shares currently trading at 7.3 times and 6.7 times consensus estimates for 2022 and 2023, respectively, compared with an average of 9.6 (18.2) times trailing earnings during the past five (10) years. Although the stock is currently trading at a more than 10% discount to our revised fair value estimate, we continue to recommend BlackRock for investors looking for exposure to the traditional asset managers, as we see firms like AMG being affected far more by the secular and cyclical headwinds facing the industry right now.