Zacks Industry Outlook Highlights T. Rowe Price, SEI Investments and Artisan Partners Asset Management
For Immediate Release
Chicago, IL – August 4, 2023 – Today, Zacks Equity Research discusses T. Rowe Price Group TROW, SEI Investments Co. SEIC and Artisan Partners Asset Management APAM.
Industry: Investment Management
Link: https://www.zacks.com/commentary/2131856/3-stocks-from-the-prospering-investment-management-industry
The high interest rate environment is expected to keep supporting revenues for the Zacks Investment Management industry stocks. While the continued shift in investor preference toward passive investing may weigh on margins to some extent, higher rates will aid margin growth.
Amid the pandemic-induced uncertainty, investment management companies benefited from higher volatility and client activity. Despite the current subdued market volatility, investment managers are expected to witness growth in their assets under management (AUM) balances because of asset inflows. Thus, firms like T. Rowe Price Group, SEI Investments Co. and Artisan Partners Asset Management will benefit.
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 Keep an Eye on
Despite Shift in Preferences, Higher Interest Rates Likely to Aid Margins: Interest rate hikes from 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, given the continued need for low-cost investment strategies, the demand for passive investing has been on the rise, which has hurt investment managers' margin growth.
Nevertheless, while the Federal Reserve paused rate hikes in June, it increased rates again in July, and is expected to keep interest rates high in the near term. Thus, rising rates are expected to support margin growth to an extent, while higher funding costs may slightly weigh on it.
AUM Growth 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. 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.
While the overall market volatility has decreased so far in 2023, various asset managers are still experiencing asset inflows, as investors seek higher yields. Thus, despite the current challenging market conditions, AUM growth is expected to continue in the near term. Asset managers' top lines are, therefore, expected to be positively impacted by higher 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 lines.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Investment Management industry is a 41-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #112, which places it at the top 45% 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 a bright earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are slowly gaining confidence in this group's bottom-line growth potential following the release of better-than-expected second-quarter 2023 results. The industry's current-year earnings estimates have been revised marginally upward since the end of June 2023.
Before we present a few stocks from the industry that you may want to consider for your portfolio, 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 the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively lost 10.6%. The S&P 500 composite has rallied 3.2%, while the Zacks Finance Sector has depreciated 2.2%.
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 3.75X. This compares with the highest level of 5.43X, the lowest level of 2.12X and the median of 3.69X 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 10.92X, 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 4.51X for the same period is above the Zacks Investment Management industry's ratio, which the chart below shows.
3 Investment Management Stocks to Buy
T. Rowe Price: Headquartered in Baltimore, T. Rowe Price is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans, and financial intermediaries.
The company, with a market capitalization of more than $25 billion, had total AUM worth $1.4 trillion as of Jun 30, 2023. Supported by a diverse business model, the company's AUM witnessed a compound annual growth rate (CAGR) of 5.2% over the past five years (2017-2022), with the upward momentum continuing in the first half of 2023. Its strong brand, consistent investment record and decent business volumes are expected to keep supporting AUM growth.
Also, the company's net revenues saw a three-year (ended 2022) CAGR of 2.2%. TROW's focus on fortifying its business by enhancing investment capabilities and broadening distribution reach will continue to support the top line.
T. Rowe Price's inorganic growth efforts are also impressive. In April 2023, it acquired Retiree, a fintech firm providing innovative retirement income planning software. In December 2021, T. Rowe Price completed the buyout of Oak Hill Advisors, L.P., while in May 2021, it transformed the responsibility of its full-service retirement recordkeeping business to Fidelity National, which came into effect in August 2021. As TROW is committed to diversifying its revenue streams and meeting customer needs, such endeavors will likely support its long-term prospects.
In the past three months, shares of TROW have gained 12.2%. Over the past 60 days, the Zacks Consensus Estimate for the company's 2023 earnings has been revised 5.3% higher to $6.99 per share, whereas its 2024 earnings estimates have witnessed an upward revision of 6.8% to $7.40. TROW currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today's Zacks #1 Rank stocks here.
SEI Investments: Headquartered in Oaks, PA, this Zacks Ranked #2 (Buy) asset management company is a leading provider of wealth management business solutions in the financial services industry. The company offers investment processing, management and operations solutions globally. It has a market cap of $8.3 billion.
The company's revenues witnessed a CAGR of 5.5% over the last five years (2017-2022). Despite a tough asset-gathering backdrop in the second half of 2018, its total AUM witnessed a CAGR of 3.2% over the same period, with the upward momentum continuing in the first six months of 2023.
As of Jun 30, 2023, SEIC administered $1.32 trillion in hedge funds, private equity, mutual funds and pooled or separately managed assets. Its total AUM included $86.5 billion, managed by its affiliate, LSV Asset Management.
The company's diversified products and revenue mix, a strong global presence, the acquisition of Atlas Master Trust (November 2021), and a solid AUM balance reflect improving prospects. Also, its deal to acquire National Pensions Trust will enhance its position in the defined contribution market.
Further, technology is the backbone of SEI Investments' businesses. The company's 2021 strategic acquisitions, including Oranj's cloud-native technology platform, Finomial and Novus, support its technological advancement efforts. In 2022, the company launched SEI Data Cloud through a strategic partnership with Snowflake to address the financial services industry's demand for more advanced data integration. These initiatives and constant innovations in software will likely help SEIC win clients and, thus, support top-line growth.
SEIC's shares have gained 6.9% in the past three months. Over the past 60 days, the Zacks Consensus Estimate for its 2023 earnings has been revised upward by 2.9% to $3.50 per share. Earnings estimates for 2024 have been revised 2.9% upward to $3.96.
Artisan Partners: Based in Milwaukee, WI, Artisan Partners is an investment management firm focused on providing high-value-added, active investment strategies to clients globally. The company has a market cap of $3.3 billion and carries a Zacks Rank of 2 at present.
As of Jun 30, 2023, it had total AUM worth $143 billion. Moreover, the company's AUM has witnessed a four-year (2018-2022) CAGR of 7.4%, with the rising trend continuing in the first six months of 2023. The company's efforts to add investment strategies have supported AUM growth.
APAM's revenue growth story is impressive, as its revenues witnessed a CAGR of 4.6% over the four-year period ended 2022. The increase was mainly driven by a solid AUM balance. Artisan Partners' diverse product offerings and investment strategies continue to attract investors, and are expected to keep supporting revenue growth.
The company maintains decent funds for operations and new products, and continues investing in new teams, and technological and operational capabilities. Such efforts are likely to boost revenues in the upcoming period.
APAM's shares have gained 21.1% in the past three months. Over the past 60 days, the Zacks Consensus Estimate for its current-year earnings has been revised 4.4% lower to $2.63 per share. Likewise, earnings estimates for the next year have been revised 1% downward to $2.93.
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T. Rowe Price Group, Inc. (TROW) : Free Stock Analysis Report
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