Company Reports

Cash and passive products supplied nearly all the second-quarter inflows at DWS, which ran at 9% of assets annualized and double consensus expectations. That mix should have cost fee margin. Instead, the margin rose, as active equity assets grew nearly twice as fast as the group.

DWS spent its first years as a listed company dogged by problems mostly of its own making. Multiple leadership changes left it without a clear strategy or a sense of what it wanted to be, and it lacked control over a cost base largely set by parent Deutsche Bank. To top it all, a greenwashing scandal hit while assets were already leaving.

Nuveen’s all-cash bid of GBP 5.90 per share for Schroders has been making headlines and overshadowed the firm’s strong second-half results, where adjusted operating profit surged 43%, and efficiency gains pushed its cost/income ratio below guidance.

We have updated our view on DWS following the substantial efforts that management has made to streamline the operating model and sharpen strategic focus.

DWS' new management team has made solid progress in stabilizing the business, reflected by positive net inflows and a substantial decrease in the cost base relative to revenue. But organizational culture does not change overnight, and we remain cautious about further steps as the brand has been damaged by management instability, multiple restructurings, and the well-publicized greenwashing scandal in the past.

DWS saw its 11th consecutive quarter of net inflows, booking EUR 10.3 billion for the period. Management remains committed to its full-year EPS target of EUR 4.5 per share, which would represent an increase of almost 40% compared with 2024. The shares rose 4% at market open on Oct. 29.

DWS reported net inflows of EUR 8.5 billion for the second quarter, driven by strong execution and active cost management, which supported bottom-line growth of 32%. The market reacted positively, with the stock rising 6% in intraday trading on July 24.

After years of lagging its peers, DWS started showing positive inflows. The new management is keeping a lid on restructuring costs, which supports reported margins.

DWS' new management team has made a positive start in stabilizing the business, but organizational culture does not change overnight and we remain concerned that the brand has been damaged by management instability, multiple restructurings, and the well-publicized greenwashing scandal.

No-moat DWS Group finished the year strongly with better-than-expected net client inflows, resilient fee margins, and sound cost control. Previously, we were skeptical about DWS' EUR 4.50 per share 2025 earnings guidance (which implies a 37% increase over 2024), but this is starting to look achievable. In new guidance, DWS expects 10% EPS growth for 2026 and 2027. DWS also now guides for EUR 150 billion of cumulative net client inflows over 2025-27, a 15% organic growth rate in assets under management. DWS currently trades at 10 times its forward earnings. We do not think this depressed multiple reflects its growth prospects or the high profitability and free cash flow generation inherent to its business model.

DWS' new management team has made a positive start in stabilizing the business, but organizational culture does not change overnight and we remain concerned that the brand has been damaged by management instability, multiple restructurings, and the well-publicized greenwashing scandal.

No-moat DWS reported a net income of EUR 168 million for the third quarter of 2024, 14% higher than a year earlier. The results were 7% ahead of the company-compiled consensus, driven by slightly-higher-than-expected revenue and 3% lower-than-expected operating expenses. After updating our model with the results, we increased our fair value estimate for DWS to EUR 54 per share from EUR 50 per share previously. We now forecast a lower decline in fee margins and expect lower growth in operating expenses than before.

The second quarter of 2024 was challenging for no-moat DWS, marred by EUR 19 billion of client outflows. Nevertheless, net income grew by just over 10% quarter over quarter and year over year. Despite the outflows, management provided improved guidance for 2024 and remains optimistic about meeting its 2025 target. Client retention is an indicator that clients face switching costs. DWS’ patchy client retention history does not provide us with enough confidence that DWS benefits from sufficient switching costs to justify an economic moat rating. We maintain our fair value estimate of EUR 50/share.

We increased our fair value estimate for DWS to EUR 50 per share from EUR 48. We believe that its new management team will be more focused on cost discipline and delivering profitability to DWS' shareholders. Furthermore, we think that DWS has a strong presence in Germany—its primary market—and benefits from it distribution agreement with Deutsche Bank. DWS has shown ambition to expand to private markets with private credit and infrastructure strategies, but we cannot see how it aims to compete in private markets yet; its scale and worldwide presence might help. DWS is now trading at a 14% discount to our fair value estimate, which suggests that some upside remains.

DWS' new management team has made a positive start in stabilizing the business, but organizational culture does not change overnight and we remain concerned that the brand has been damaged by management instability, multiple restructurings, and the well-publicized greenwashing scandal.

No-moat DWS reported a decent 5% growth in assets under management, or AUM, for the first quarter of 2024 compared with year-end 2023 and 12% growth compared with first-quarter 2023, leading DWS toward EUR 941 billion in total AUM. Most of the AUM increase is attributable to positive market dynamics and currency effects in fourth-quarter 2023 and first-quarter 2024, however, client net flows remained positive, as well. While we applaud DWS’ fundraising efforts, we are concerned about margin pressure and we are skeptical that it can achieve its cost/income target. We will update our model shortly, and that could result in a change to our EUR 48 per share fair value estimate. After a 30% rally in its share price, DWS is now trading at a 20% discount to our fair value estimate, which suggests that some upside remains.

DWS' new management team has made a positive start in stabilizing the business, but organizational culture does not change overnight and we remain concerned that the brand has been damaged by management instability, multiple restructurings, and the well-publicized greenwashing scandal.

We are dropping coverage of some of our European banks and asset managers. We will no longer be reporting on Santander, Credit Agricole, Julius Baer, Unicredit, Intesa Sanpaolo, Mediobanca, Amundi, KBC, DWS Group, BBVA, and Schroders. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

No-moat DWS reported another robust set of results for fourth-quarter 2021, growing net profit by 59% year on year to EUR 260 million. Net profit for the quarter also came in substantially ahead of the EUR 183 million the consensus of analysts collected by DWS expected. We have been critical in the past about DWS’ ability to hold on to client assets; this has also been one of the main reasons why we have not awarded DWS a moat rating. For the 2021 fiscal year, DWS recorded net new money inflows of EUR 48 billion--of which EUR 42 billion was into noncash funds. The positive inflows continue a trend of positive net inflows that started in 2019. If DWS can continue on this course in a more challenging fiscal 2022, it could force us to revisit our no moat rating for the firm. We maintain our EUR 56/share fair value estimate.

Years of mismanagement, at least four failed restructurings--where DWS Group GmbH & Co. was tossed around like an unwanted orphan between various divisions within Deutsche Bank--and countless management changes have left their mark on the business. DWS needs stability above anything else. Sticking to a strategy and a management team are needed to steady the ship.