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Near-Term Outlook Bright for Investment Management Industry
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The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals, and 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 by themselves. The diversification helps in reducing the impact of volatility, and hence ensures steady returns over time, as investment managers invest clients’ assets in different asset classes, depending on their need and risk-taking ability.
Coronavirus fears have led to an unexpected rise in volatility in the equity markets in the past couple of weeks. Of late, markets have been witnessing volatility due to several other geopolitical headwinds as well. In the past few months, while some industry players have witnessed active equity inflows, most have witnessed overall asset outflows. Despite persistent outflows, growth in assets under management (AUM) is expected to continue in the near term, driven by expectations of a speedy resolution of the above-mentioned concerns. And, since the majority of asset managers’ revenues come from performance fees and investment advisory fees, their top lines are expected to improve modestly in the near term.
Given the continued need for low-cost investment strategies, the demand for passive investing has been on the rise over the past few years. Many investors have already shifted preference from active to passive management, and the same is expected to continue in 2020. Thus, due to the continued shift to institutional investments in lower-cost passive mandates, away from the more profitable active strategies, margins of asset managers are likely to remain under pressure. Nonetheless, this has resulted in a rise in industry consolidation. Last month, Franklin Resources entered into an all-cash deal to acquire Legg Mason, which upon completion will create one of the world’s largest independent, specialized global investment managers.
The tightening of regulations to increase transparency has led to a rise in compliance costs for investment managers. Moreover, as wealth managers are constantly trying to upgrade technology to keep up with the evolving customer needs, technology costs are expected to continue rising. These will likely lead to an increase in overall expenses.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Investment Management industry is a 47-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #48, which places it at the top 19% 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags on Stock Market Performance
The Zacks Investment Management industry has underperformed both the S&P 500 composite and its sector over the past two years.
Stocks in the industry have collectively lost 37.5% over the past two years. The Zacks Finance sector has declined 20.7% and the Zacks S&P 500 composite has lost 1.1% over the same period.
Two-Year Price Performance
Industry’s 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 1.92x. This compares with the highest level of 3.83x, the lowest level of 1.65x and median of 3.04x over the past five years. Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 10.40x, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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 ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TB of 2.67x for the same period is above that for the Zacks Investment Management industry, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
Bottom Line
While margin compression, and escalating compliance and technology costs are expected to hurt investment managers’ profits in the near term, these have resulted in an increase in consolidation efforts among industry players. Also, modest growth in AUM is likely to aid revenues.
One should particularly consider betting on investment management stocks with an upbeat earnings outlook. We are presenting three stocks with a Zacks Rank #1 (Strong Buy) and one with a Zacks Rank #2 (Buy) that investors may consider betting on.
Cohen & Steers, Inc. (CNS - Free Report) : The New York-based company has gained 9.6% over the past year. The Zacks Consensus Estimate for its 2020 earnings has been raised 7.6% over the past 60 days. It has a projected year-over-year earnings growth rate of 16% for 2020. The company currently sports a Zacks Rank #1.
Price and Consensus: CNS
Virtus Investment Partners, Inc. (VRTS - Free Report) : The Zacks Consensus Estimate for earnings of the Hartford-based company has been revised upward by 6.4% for the current year over the past 60 days. Its earnings are projected to witness year-over-year growth of 14.2% in the current year. The stock has lost 20.2% over the past year. It presently sports a Zacks Rank of 1.
Price and Consensus: VRTS
Artisan Partners Asset Management Inc. (APAM - Free Report) : This Milwaukee, WI-based company currently sports a Zacks Rank of 1. Its earnings are projected to grow 13.5% in 2020 on a year-over-year basis. The consensus estimate for its current-year earnings has been revised 5.2% upward over the past 60 days. The stock has lost 23.9% over the past year.
Price and Consensus: APAM
Legg Mason, Inc. : The Baltimore-based company has gained 67.6% over the past year. The Zacks Consensus Estimate for its earnings for the current fiscal year has been revised 1.6% upward over the past 60 days. The company currently carries a Zacks Rank of 2. Its earnings are expected to witness significant growth in fiscal 2020 on a year-over-year basis.
Price and Consensus: LM
Zacks Top 10 Stocks for 2020
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Last year's 2019 Zacks Top 10 Stocks portfolio returned gains as high as +102.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
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Near-Term Outlook Bright for Investment Management Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals, and 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 by themselves. The diversification helps in reducing the impact of volatility, and hence ensures steady returns over time, as investment managers invest clients’ assets in different asset classes, depending on their need and risk-taking ability.
Some of the prominent names in the industry are Affiliated Managers Group, Inc. (AMG - Free Report) , Ameriprise Financial, Inc. (AMP - Free Report) , Franklin Resources, Inc. (BEN - Free Report) , BlackRock, Inc. (BLK - Free Report) , Invesco Ltd. (IVZ - Free Report) , T. Rowe Price Group, Inc. (TROW - Free Report) and Principal Financial Group, Inc. (PFG - Free Report) .
Here are the industry’s three major themes:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Investment Management industry is a 47-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #48, which places it at the top 19% 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags on Stock Market Performance
The Zacks Investment Management industry has underperformed both the S&P 500 composite and its sector over the past two years.
Stocks in the industry have collectively lost 37.5% over the past two years. The Zacks Finance sector has declined 20.7% and the Zacks S&P 500 composite has lost 1.1% over the same period.
Two-Year Price Performance
Industry’s 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 1.92x. This compares with the highest level of 3.83x, the lowest level of 1.65x and median of 3.04x over the past five years. Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 10.40x, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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 ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TB of 2.67x for the same period is above that for the Zacks Investment Management industry, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
Bottom Line
While margin compression, and escalating compliance and technology costs are expected to hurt investment managers’ profits in the near term, these have resulted in an increase in consolidation efforts among industry players. Also, modest growth in AUM is likely to aid revenues.
One should particularly consider betting on investment management stocks with an upbeat earnings outlook. We are presenting three stocks with a Zacks Rank #1 (Strong Buy) and one with a Zacks Rank #2 (Buy) that investors may consider betting on.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Cohen & Steers, Inc. (CNS - Free Report) : The New York-based company has gained 9.6% over the past year. The Zacks Consensus Estimate for its 2020 earnings has been raised 7.6% over the past 60 days. It has a projected year-over-year earnings growth rate of 16% for 2020. The company currently sports a Zacks Rank #1.
Price and Consensus: CNS
Virtus Investment Partners, Inc. (VRTS - Free Report) : The Zacks Consensus Estimate for earnings of the Hartford-based company has been revised upward by 6.4% for the current year over the past 60 days. Its earnings are projected to witness year-over-year growth of 14.2% in the current year. The stock has lost 20.2% over the past year. It presently sports a Zacks Rank of 1.
Price and Consensus: VRTS
Artisan Partners Asset Management Inc. (APAM - Free Report) : This Milwaukee, WI-based company currently sports a Zacks Rank of 1. Its earnings are projected to grow 13.5% in 2020 on a year-over-year basis. The consensus estimate for its current-year earnings has been revised 5.2% upward over the past 60 days. The stock has lost 23.9% over the past year.
Price and Consensus: APAM
Legg Mason, Inc. : The Baltimore-based company has gained 67.6% over the past year. The Zacks Consensus Estimate for its earnings for the current fiscal year has been revised 1.6% upward over the past 60 days. The company currently carries a Zacks Rank of 2. Its earnings are expected to witness significant growth in fiscal 2020 on a year-over-year basis.
Price and Consensus: LM
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2020?
Last year's 2019 Zacks Top 10 Stocks portfolio returned gains as high as +102.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
Access Zacks Top 10 Stocks for 2020 today >>