For Immediate Release
Chicago, IL – November 28, 2022 – Today, Zacks Equity Research discusses BlackRock, Inc. BLK, Ameriprise Financial, Inc. AMP, Affiliated Managers Group, Inc. AMG and Prospect Capital Corp. PSEC.
Industry: Investment Management
Higher interest rates will benefit the Zacks Investment Management industry stocks, which bore the brunt of low rates during the pandemic. While elevated technology costs might hurt profitability, investment managers' margins will no longer be under pressure given the rate hikes. This should aid revenue growth.
Moreover, investment managers have benefited from higher volatility and client activity amid the pandemic. Although markets normalized in second-half 2021, client activity has gained momentum once again. Hence, BlackRock, Inc., Ameriprise Financial, Inc., Affiliated Managers Group, Inc. and Prospect Capital Corp. should benefit from growth in assets under management (AUM).
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 impact of volatility and ensures steady returns over time.
3 Investment Management Industry Trends to Consider
Interest Rate Hikes to Aid Margin Growth Despite Shift in Preferences: Similar to the past few years, demand for passive investing has been on the rise on the continued need for low-cost investment strategies. Thus, rising demand for passive investments is expected to negatively impact investment managers' margin growth to some extent. Nevertheless, the interest rate hikes since the beginning of this year to tame the raging inflation will likely result in an improvement in margins in the near term. Also, the rise in industry consolidation witnessed since the beginning of 2020 is likely to support bottom-line growth.
Growth in AUM Likely to Continue Despite a Volatile Trend in Asset Flows: 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. Nevertheless, the first nine months of 2022 again witnessed an unexpected rise in volatility and relatively higher client activity, resulting in asset inflows for the majority of the industry players.
Thus, despite a volatile trend in flows (seen recently), growth in AUM is expected to continue in the near term. Asset managers' top lines are, therefore, expected to improve, supported by higher performance fees and investment advisory fees, which constitute the majority of their revenues.
Elevated Costs Remain 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 Bright Prospects
The Zacks Investment Management industry is a 44-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #89, which places it at the top 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 outperformance 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 top 50% of the Zacks-ranked industries is a result of bright earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have just started gaining confidence in this group's bottom-line growth potential. The industry's current-year earnings estimates have been revised 1.3% higher since the end of October 2022.
Thus, we present a few stocks from the prospering industry that you may want to keep an eye on. But before that, 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 2.4%. The S&P 500 composite has rallied 9.6% and the Zacks Finance Sector has appreciated 12.2%.
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 3.90X. This compares with the highest level of 5.27X, the lowest level of 2.04X and the median of 3.59X 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 10.30X, which the chart below shows.
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 4.69X for the same period is above the Zacks Investment Management industry's ratio.
4 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 $110.6 billion. The company's diversified products, revenue mix and inorganic expansion efforts have been aiding AUM growth. As of Sep 30, 2022, BlackRock had total AUM worth $7.96 trillion.
The company's AUM has witnessed a seven-year (2015-2021) compound annual growth rate (CAGR) of 13.6%. While its AUM balance declined in the first nine months of 2022 due to the tough operating backdrop amid the macroeconomic concerns, the trend will likely reverse in the future.
The company 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 keep aiding profitability.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In June 2021, it acquired the Climate Change Scenario Model of Baringa Partners. In February 2021, it 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.
Moreover, in August 2022, BlackRock partnered with cryptocurrency exchange, Coinbase Global, to provide its institutional clients with access to digital currencies. Through the partnership, BlackRock's institutional clients will have access to crypto trading, custody, prime brokerage, and reporting via Coinbase Prime, which is the exchange's institutional platform, providing a wide range of features and tools.
In the past three months, shares of BlackRock have gained 8.8%. Over the past 30 days, the Zacks Consensus Estimate for the company's 2022 earnings has been revised marginally upward to $33.88 per share, whereas its 2023 earnings estimates have witnessed a downward revision of 1% to $34.08.
Ameriprise: Headquartered in Minneapolis, MN, Ameriprise has a market cap of $35.4 billion. Since 2005-end, the company has been operating independently of American Express Company. As of Sep 30, 2022, it owned, managed and administered assets worth $1.1 trillion.
Ameriprise operates a well-diversified portfolio compared with its industry peers. It constantly modifies its product and service-offering capacity to keep pace with dynamic market needs. This strategy, along with asset growth, has helped the company witness a rise in total net revenues.
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. Notably, AMP maintains long-term issuer ratings of A- from S&P Global and Fitch, and A3 from Moody's Investors Service, with a rating outlook of stable from all three agencies. The company currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
AMP's shares have gained 21% over the past three months. Over the past 30 days, the Zacks Consensus Estimate for its 2022 earnings has been revised upward by 3% to $24.56 per share. Likewise, earnings estimates for 2023 have been revised upward by 2.1% to $29.09.
Affiliated Managers: Headquartered in Massachusetts, Affiliated Managers has equity investments in a large group of investment management firms or affiliates. The affiliates manage more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, and alternative and fixed-income products. The company has a market cap of $5.9 billion.
As of Sep 30, 2022, this Zacks Ranked #3 company had total AUM of $644.6 billion. AMG is expected to continue generating meaningful growth through new investments. Its successful partnerships and focus on strengthening the retail market operations will likely keep aiding profits.
Affiliated Managers has been targeting investments in alternatives and global strategies, given the strong investor preference for the same. The acquisitions of the majority stakes in Parnassus Investments and Abacus Capital Group, along with the buyouts of minority stakes in OCP Asia, Boston Common Asset Management and Systematica, are steps in this direction.
While Affiliated Managers' affiliates have been witnessing overall net outflows over the past few years, the company's differentiated product categories are likely to support cash flows across channels.
AMG has appreciated 20.1% over the past three months. The Zacks Consensus Estimate for its 2022 earnings has been revised upward by 7.5% to $19.53 per share over the past 30 days. Likewise, earnings estimates for 2023 have been revised upward by 5.2% to $19.48.
Prospect Capital: Headquartered in New York, NY, PSEC has a market cap of $3.1 billion. The company is a leading provider of private debt and private equity to middle-market companies in the United States, with a focus on sponsor-backed transactions and direct lending to established owner-operated companies. It currently sports a Zacks Rank #1.
PSEC invests primarily in first-lien and second-lien senior loans and mezzanine debt, which in some cases include an equity component. Since its inception in 2004, Prospect Capital has invested $19.6 billion across 403 investments, exiting 274 of these investments.
As of Sep 30, 2022, the company had investments in 128 long-term portfolio investments and CLOs, which had a fair value of $7.58 million.
Over the last three fiscal years (ended June 2022), the company's total investment income witnessed a CAGR of 6.8%. The upward trend continued in the Sep-end quarter.
Given a solid balance sheet and liquidity position, the company is expected to enhance shareholder value through efficient capital deployment activities. On Aug 24, 2011, its board of directors approved a share repurchase plan to buy back shares worth up to $0.1 million. As of Sep 30, 2022, $65,860 worth of shares were available for repurchase under the authorization.
PSEC's shares have lost 0.2% over the past three months. Over the past 30 days, the Zacks Consensus Estimate for its current fiscal year earnings has been revised 5.2% upward to $1.01 per share. Likewise, earnings estimates for the next fiscal year have been revised 8.3% upward to $1.04.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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