Greggory Warren: It's been a difficult year for the U.S.-based asset managers, with the 12 firms we cover down more than 25% on average since the start of 2018, compared with a less than 1% decline for the S&P 500 index.
While valuations have become depressed across the group, they've also bifurcated between the perceived "haves"--which include wide-moat-rated BlackRock and T. Rowe Price and narrow-moat-rated Eaton Vance and Cohen & Steers--which are generating above-average rates of organic growth and operating margins (and are currently trading at 20%-plus premiums to the group on a price/earnings basis); compared with those that are viewed as "have nots"--narrow-moat-rated Invesco, AMG, Franklin Resources, and Janus Henderson as well as no-moat rated Legg Mason, AllianceBernstein, Federated Investors, and Waddell & Reed--some of which actually deserve to be trading at steep discounts to the group, given the poorer positioning of their product sets either from an investment performance or from a management fee perspective.
We continue to believe that 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; the distribution-channel disruption on the retail-advised side of the business in the U.S. and other developed markets; the ongoing shift from active to passive products; a much greater focus on relative and absolute fund investment performance as well as management fees--are all working against the ability of these firms to generate sustainable levels of organic growth and are also having a negative impact on asset manager revenue and expenses, which is affecting the way that investors view the asset managers in the marketplace.
This is a group of companies where investors tend to reward firms with above average organic AUM growth and above average levels of operating profitability.
While we have generally been able to recommend second-tier names--those lacking in either one of those attributes--during past market downturns, we think that where we are today, with the bull market in equities that started in the aftermath of the financial crisis struggling to extend itself, that it will pay to stick with the high quality, wide-moat names in the group: namely BlackRock which is the leading provider of exchange-traded funds, as well as garnering more than 80% of its assets from institutional clients; and T. Rowe Price, which has the best and most consistent active investment performance in the group, as well as among the universe of 150 fund companies we cover, and also derives more than two thirds of its AUM from retirement-based products, which are far stickier than most of the other channels the asset managers serve.