For Immediate Release
Chicago, IL – May 12, 2023 – Today, Zacks Equity Research discusses like BlackRock, Inc. BLK, Ameriprise Financial, Inc. AMP and Invesco Ltd. IVZ.
Industry: Investment Management
The continued shift in investor preference toward passive investment strategies is expected to hamper top-line growth of the Zacks Investment Management industry stocks. Moreover, elevated technology costs will likely hurt profitability to an extent.
Amid the pandemic-induced uncertainty, investment management companies benefited from higher volatility and client activity. While client activity remains decent, investment managers are not expected to witness impressive growth in their assets under management (AUM) balances because of volatile asset flows. Nevertheless, firms like BlackRock, Inc., Ameriprise Financial, Inc. and Invesco Ltd. are expected to benefit from an increasing interest rate environment.
About the Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals. They earn by charging service fees or commissions. Investment managers are also called asset managers, as they manage hedge funds, mutual funds, private equity, venture capital and other financial investments for third parties.
By appointing an investment manager for one's assets, investors get more diversification options than they would have if they managed their assets by themselves. Investment managers invest their clients' assets in different asset classes, depending on their needs and risk-taking abilities. Hence, the diversification, which investors get by appointing asset managers to manage their assets, helps reduce the impacts of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Keep an Eye on
Despite Higher Rates, Shift in Preferences to Result in Muted Growth in Margins: Interest rate hikes since the beginning of 2022 have resulted in an improvement in investment managers' margins. Also, the rise in industry consolidation witnessed since 2020 is likely to continue supporting bottom-line growth.
However, similar to the past few years, the demand for passive investing has been on the rise on the continued need for low-cost investment strategies. Thus, while higher interest rates are expected to continue to positively impact investment managers' margins to some extent in the near term, rising demand for passive investments will partly offset the impact.
A Volatile Trend in Asset Flows Likely to Hurt AUM Growth: In 2020 and the first half of 2021, there was a significant rise in equity market volatility and solid client activity, owing to the coronavirus-induced uncertainty, which aided total AUM growth. In the second half of 2021, markets began to normalize, with client activity remaining decent. Year 2022 again witnessed an unexpected rise in volatility and relatively higher client activity, resulting in asset inflows for the majority of the industry players.
However, of late, AUM growth has not been impressive because of a volatile trend in flows. Thus, the current challenging market conditions are expected to hamper AUM growth to some extent in the near term. Asset managers' top lines are, therefore, expected to be negatively impacted by lower performance fees and investment advisory fees, which constitute the majority of their revenues.
Elevated Costs Are Concerning: The tightening of regulations to increase transparency has led to a rise in compliance costs for investment managers. Also, as wealth managers are constantly trying to upgrade technology to keep up with evolving customer needs, technology costs are expected to keep rising. These will likely lead to an increase in overall expenses, thus, hurting investment managers' bottom line.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 43-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #164, which places it at the bottom 35% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a dismal earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's bottom-line growth potential. The industry's current-year earnings estimates have been revised 21.4% lower since the end of May 2022.
Before we present a few stocks from the industry that you may want to keep an eye on, let's check out the industry's recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Investment Management industry has underperformed both the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively lost 27.9%. The S&P 500 composite has rallied 0.4% and the Zacks Finance Sector has depreciated 9.5%.
Industry's Current Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing finance companies because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 3.37X. This compares with the highest level of 5.43X, the lowest level of 2.12X and the median of 3.71X over the past five years. Additionally, the industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 10.31X.
As finance stocks typically have a low P/TB ratio, comparing investment managers with the S&P 500 may not make sense to many investors. But a comparison of the group's P/TB ratio with that of its broader sector seems more meaningful. When we compare the group's P/TB ratio with the broader Finance sector, it seems that the group is trading at a decent discount. The Zacks Finance sector's trailing 12-month P/TB of 4.44X for the same period is above the Zacks Investment Management industry's ratio.
3 Investment Management Stocks to Keep an Eye On
BlackRock: The New York, NY-based Zacks Ranked #3 (Hold) company is the largest asset manager by assets in the United States, with a market capitalization of $95.5 billion. The company's diversified products, revenue mix and inorganic expansion efforts have been aiding AUM growth. As of Mar 31, 2023, BlackRock had total AUM worth $9.09 trillion.
The company's AUM witnessed a seven-year (2016-2022) compound annual growth rate (CAGR) of 8.9%. Thus, a robust AUM balance will keep aiding the top line. BLK has been continuously strengthening its iShares and exchange-traded funds (ETF) operations. Its efforts to gain market share in the active equity business will likely support profitability.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In June 2021, the company acquired the Climate Change Scenario Model of Baringa Partners. In February 2021, BLK completed the acquisition of investment management services provider, Aperio Group. Apart from these, over the years, the company has acquired several firms across the globe, thus, expanding its footprint and market share.
In the past year, shares of BlackRock have gained 4.8%. Over the past 60 days, the Zacks Consensus Estimate for the company's 2023 earnings has been revised 1.1% lower to $34.45 per share, whereas its 2024 earnings estimates have witnessed an upward revision of 1.1% to $39.94.
Ameriprise: Headquartered in Minneapolis, MN, the company has a market cap of $30.6 billion. Since 2005-end, AMP has been operating independently of American Express Company. As of Mar 31, 2023, Ameriprise owned, managed and administered assets worth $1.24 trillion. The company currently carries a Zacks Rank of 3.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Ameriprise operates a well-diversified portfolio compared with its industry peers. The company constantly modifies its product and service-offering capacity to keep pace with dynamic market needs. This strategy, along with asset growth, helped the company witness a rise in total net revenues. While net revenues (GAAP basis) witnessed a decline in 2020, the same increased, seeing a CAGR of 2.7% over the five-year period between 2018 and 2022.
Moreover, AMP has grown inorganically and restructured its business from time to time to remain profitable by focusing on its core operations. In November 2021, the company acquired BMO Financial Group's EMEA asset management operations, which will bolster its wealth and asset management businesses, and global diversification efforts. In July 2021, it closed a deal for RiverSource Life Insurance Company (its insurance subsidiary) with Global Atlantic's subsidiary, Commonwealth Annuity and Life Insurance Company, to reinsure $7 billion of fixed deferred and immediate annuity policies.
In 2019, it divested the Ameriprise Auto & Home business. These initiatives, along with a few others, are expected to continue supporting revenue growth.
AMP's shares have gained 15.9% over the past year. Over the past 60 days, the Zacks Consensus Estimate for its 2023 earnings has been revised lower by 2.2% to $30 per share. However, earnings estimates for 2024 have been revised marginally upward to $33.40.
Invesco: Headquartered in Atlanta, GA, the company — formerly AMVESCAP PLC — operates as an independent investment manager, and offers a wide range of investment products and services. Invesco has offices in more than 20 countries and as of Mar 31, 2023, it had AUM worth $1.48 trillion.
The Zacks Rank #3 company, with a market cap of $7.4 billion, has been witnessing a consistent improvement in AUM. Though the total AUM balance declined in 2022, the same witnessed a CAGR of 2.2% over the three years ended 2022. The acquisition of OppenheimerFunds primarily resulted in the rise in the company's AUM, making it one of the leading global asset managers.
Moreover, IVZ has been undertaking initiatives to improve operating efficiency. Though the company's operating expenses have recorded a rise in the past, the same has been decreasing since 2021.
Apart from a strong presence in the United States, Invesco maintains a solid foothold in Europe, Canada and the Asia Pacific. Acquisitions of the leading U.K.-based advisor-focused digital solutions firm Intelliflo, along with Europe-based Source, a leading, independent specialist provider of ETFs, to improve market share globally continue to support Invesco's global presence. Broad diversification will likely help the company generate further momentum from business in such regions.
IVZ's shares have lost 7.8% over the past year. Over the past 60 days, the Zacks Consensus Estimate for its current-year earnings has been revised 2.5% upward to $1.64 per share. Likewise, earnings estimates for the next year have been revised 1.6% upward to $1.96.
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