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The continued shift in investor preference toward passive investment strategies is expected to hamper top-line growth of the Zacks Investment Management industry stocks. Elevated technology costs will likely hurt profitability to an extent.
While investment management companies benefited from significantly higher volatility and client activity in the past, they are not likely to record impressive growth in their assets under management (AUM) balances in the near term due to volatile asset flows. Despite the rate cuts, firms like BlackRock, SEI Investments Co. and Affiliated Managers Group are expected to gain from the relatively high 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 Key Themes to Watch in the Investment Management Industry
A Volatile Trend in Flows Likely to Hamper AUM Growth: In 2020 and the first half of 2021, there was a significant rise in equity market volatility and 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 being decent.
The 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 2023 and the first half of 2024 saw relatively lower market volatility, client activity remained decent on the back of investors seeking higher yields from different asset classes.
Thus, amid the current challenging market conditions, AUM growth might be hampered due to a volatile trend in asset flows. Asset managers' top lines are, therefore, expected to be adversely impacted to some extent because of lower performance fees and investment advisory fees, which constitute the majority of their revenues.
Despite Relatively High Rates, Shift in Preferences to Hurt Margin Growth: 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 to an extent.
Now, with inflation cooling down and the job market slowing, the central bank has started to cut interest rates. However, the rates are going to remain relatively high before they come down significantly by the end of 2025. Despite the relatively high rates, investment managers' margins may not improve significantly because of the shift in preference.
Elevated Costs are Concerning: Tighter regulations to increase transparency have 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 increased overall expenses, hurting investment managers' bottom lines.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 37-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #138, which places it at the bottom 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 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 the 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 growth potential. The industry's most recent earnings estimates for 2024 have been revised 0.3% lower since the end of September 2023.
Despite the near-term challenges, we present a few stocks from the industry that look promising. But before that, let us check out the industry's recent stock market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Investment Management industry has outperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 73.6%. The S&P 500 composite has rallied 56.8% and the Zacks Finance Sector has appreciated 50.1%.
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 4.44X. This compares with the highest level of 5.78X, the lowest level of 2.15X and the median of 3.85X 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 14.85X.
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 5.71X for the same period is slightly above the Zacks Investment Management industry's ratio.
3 Investment Management Stocks to Watch
BlackRock: The New York, NY-based Zacks Rank #2 (Buy) company is the largest asset manager (by assets) in the United States, with a market capitalization of $139 billion. The company's broad product diversification, its revenue mix and steadily improving AUM balance have been aiding the top line. As of June 30, 2024, BlackRock had total AUM of $10.65 trillion.
Over the last five years (2018-2023), the company's AUM balance witnessed a compound annual growth rate (CAGR) of 10.9%. Over the same period, its revenues (on a GAAP basis) witnessed a CAGR of 4.7%. Given its efforts to strengthen the iShares and exchange-traded funds (ETF) operations and increased focus on the active equity business, BLK's top line is expected to be positively impacted.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In June 2024, the company agreed to acquire Preqin for $3.2 billion, which marks a significant milestone in its strategy to enhance its private markets capabilities by integrating investments, technology and data across the entire portfolio. In May, BlackRock completed the deal to acquire the remaining 75% stake in SpiderRock, which will enhance its separately managed accounts offerings.
In January, BLK agreed to buy Global Infrastructure Partners. In 2023, the company acquired London-based Kreos Capital. Also, it agreed to form a joint venture with Jio Financial Services Limited, named Jio BlackRock.
Apart from these, over the years, the company has acquired several firms across the globe, expanding its footprint and market share.
Over the past six months, shares of BlackRock have gained 14.8%. Over the past 60 days, the Zacks Consensus Estimate for the company's 2024 earnings has been revised 0.3% higher to $41.37 per share.
SEI Investments: Headquartered in Oaks, PA, this asset management company, with a market cap of more than $8 billion, is a leading provider of wealth management business solutions in the financial services industry. As of June 30, 2024, it had AUM worth $470.5 billion and client assets under administration of $1 trillion.
Though the company's revenues declined in 2023, the metric witnessed a CAGR of 3.4% over the last five years (ended 2023), with the uptrend continuing in first-half 2024. Its assets under management, advisement and administration saw a CAGR of 9.7% over the same time frame.
The company's diversified products and revenue mix, strong global presence, solid AUM balance and strategic acquisitions reflect improving prospects. In December 2023, it acquired Altigo to expand in the alternatives investment space. In November 2023, the company acquired National Pensions Trust, which will likely enhance its position in the defined contribution market.
Notably, technology is the backbone of SEI Investments' businesses. The company's primary business platform — Investment Processing — delivers its outsourced software and processing services through TRUST 3000 and the SEI Wealth Platform ("SWP"). SEIC's 2021 strategic acquisitions, including Oranj's cloud-native technology platform, Finomial and Novus, support its technological advancement efforts.
The company launched two key technology enhancements through the SWP — Digital Account Open and Digital Model Management, which are available to independent advisors. In 2022, SEIC launched SEI Data Cloud through a 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 SEI Investments win clients and continue to support top-line growth.
In July 2024, SEIC announced an enhanced integration with Canoe Intelligence to boost operational efficiency for family offices via the SEI Archway Platform. This expanded relationship between both entities aims to automate the transmission of private equity and hedge fund valuations alongside private equity call and distribution data. In February, the company invested $10 million in TIFIN, a leading force in AI-driven wealth management innovation. The partnership is poised to reshape the landscape of wealth management through rapid exploration, market innovation access and talent development.
Over the past six months, SEIC shares have lost 2.4%. Over the past 60 days, the Zacks Consensus Estimate for the company's 2024 earnings has been revised 0.5% upward to $4.20 per share. SEIC currently carries a Zacks Rank #2.
Affiliated Managers: Headquartered in Massachusetts, this is a global asset manager with equity investments in a large group of investment management firms or affiliates. The company manages more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, alternative and fixed-income products. The company has a market cap of more than $5 billion. As of June 30, 2024, it had total AUM worth $701 billion.
Though AMG's consolidated revenues declined in the first half of 2024, in 2023 and 2022, owing to lower asset-based fees and performance-based fees, the metric witnessed a three-year (ended 2023) CAGR of almost 1%. Its portfolio of investment products provides a competitive edge when it comes to fulfilling the diverse needs of clients.
Moreover, with its strong balance sheet and liquidity position, the company has considerable capability to invest in other companies and generate meaningful growth through new investments. In May 2024, it acquired a minority stake in Suma Capital, marking the ninth private markets partnership. Last year, the company significantly diversified its business "in distinct fast-growing areas of private markets" by taking minority interests in Ara Partners and Forbion Group Holding B.V.
Through these, the company is reshaping its business profile with a focus on alternatives. Management noted that almost 50% of its earnings are being generated from alternative strategies (private markets and liquid alternatives), with the remaining "coming from differentiated long-only strategies."
In the last two years, divestitures of stakes in Veritable LP and Baring Private Equity Asia significantly bolstered the company's balance sheet position. It is targeting investments in alternatives, given the strong investor preference for the same.
AMG shares have gained 8.9% over the past six months. Over the past 60 days, the Zacks Consensus Estimate for its 2024 earnings has been revised 1.9% higher to $22.04 per share. The company currently carries a Zacks Rank #3 (Hold).
Why Haven't You Looked at Zacks' Top Stocks?
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Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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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Zacks Industry Outlook Highlights BlackRock, SEI Investments and Affiliated Managers
For Immediate Release
Chicago, IL – September 26, 2024 – Today, Zacks Equity Research discusses BlackRock (BLK - Free Report) , SEI Investments Co. (SEIC - Free Report) and Affiliated Managers Group (AMG - Free Report) .
Industry: Investment Management
Link: https://www.zacks.com/commentary/2341030/3-investment-management-stocks-to-watch-despite-industry-woes
The continued shift in investor preference toward passive investment strategies is expected to hamper top-line growth of the Zacks Investment Management industry stocks. Elevated technology costs will likely hurt profitability to an extent.
While investment management companies benefited from significantly higher volatility and client activity in the past, they are not likely to record impressive growth in their assets under management (AUM) balances in the near term due to volatile asset flows. Despite the rate cuts, firms like BlackRock, SEI Investments Co. and Affiliated Managers Group are expected to gain from the relatively high 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 Key Themes to Watch in the Investment Management Industry
A Volatile Trend in Flows Likely to Hamper AUM Growth: In 2020 and the first half of 2021, there was a significant rise in equity market volatility and 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 being decent.
The 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 2023 and the first half of 2024 saw relatively lower market volatility, client activity remained decent on the back of investors seeking higher yields from different asset classes.
Thus, amid the current challenging market conditions, AUM growth might be hampered due to a volatile trend in asset flows. Asset managers' top lines are, therefore, expected to be adversely impacted to some extent because of lower performance fees and investment advisory fees, which constitute the majority of their revenues.
Despite Relatively High Rates, Shift in Preferences to Hurt Margin Growth: 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 to an extent.
Now, with inflation cooling down and the job market slowing, the central bank has started to cut interest rates. However, the rates are going to remain relatively high before they come down significantly by the end of 2025. Despite the relatively high rates, investment managers' margins may not improve significantly because of the shift in preference.
Elevated Costs are Concerning: Tighter regulations to increase transparency have 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 increased overall expenses, hurting investment managers' bottom lines.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Investment Management industry is a 37-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #138, which places it at the bottom 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 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 the 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 growth potential. The industry's most recent earnings estimates for 2024 have been revised 0.3% lower since the end of September 2023.
Despite the near-term challenges, we present a few stocks from the industry that look promising. But before that, let us check out the industry's recent stock market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Investment Management industry has outperformed the S&P 500 and its sector in the past two years.
Stocks in the industry have collectively gained 73.6%. The S&P 500 composite has rallied 56.8% and the Zacks Finance Sector has appreciated 50.1%.
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 4.44X. This compares with the highest level of 5.78X, the lowest level of 2.15X and the median of 3.85X 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 14.85X.
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 5.71X for the same period is slightly above the Zacks Investment Management industry's ratio.
3 Investment Management Stocks to Watch
BlackRock: The New York, NY-based Zacks Rank #2 (Buy) company is the largest asset manager (by assets) in the United States, with a market capitalization of $139 billion. The company's broad product diversification, its revenue mix and steadily improving AUM balance have been aiding the top line. As of June 30, 2024, BlackRock had total AUM of $10.65 trillion.
Over the last five years (2018-2023), the company's AUM balance witnessed a compound annual growth rate (CAGR) of 10.9%. Over the same period, its revenues (on a GAAP basis) witnessed a CAGR of 4.7%. Given its efforts to strengthen the iShares and exchange-traded funds (ETF) operations and increased focus on the active equity business, BLK's top line is expected to be positively impacted.
Supported by a solid balance sheet and liquidity position, BlackRock has expanded via acquisitions, both domestic and overseas. In June 2024, the company agreed to acquire Preqin for $3.2 billion, which marks a significant milestone in its strategy to enhance its private markets capabilities by integrating investments, technology and data across the entire portfolio. In May, BlackRock completed the deal to acquire the remaining 75% stake in SpiderRock, which will enhance its separately managed accounts offerings.
In January, BLK agreed to buy Global Infrastructure Partners. In 2023, the company acquired London-based Kreos Capital. Also, it agreed to form a joint venture with Jio Financial Services Limited, named Jio BlackRock.
Apart from these, over the years, the company has acquired several firms across the globe, expanding its footprint and market share.
Over the past six months, shares of BlackRock have gained 14.8%. Over the past 60 days, the Zacks Consensus Estimate for the company's 2024 earnings has been revised 0.3% higher to $41.37 per share.
SEI Investments: Headquartered in Oaks, PA, this asset management company, with a market cap of more than $8 billion, is a leading provider of wealth management business solutions in the financial services industry. As of June 30, 2024, it had AUM worth $470.5 billion and client assets under administration of $1 trillion.
Though the company's revenues declined in 2023, the metric witnessed a CAGR of 3.4% over the last five years (ended 2023), with the uptrend continuing in first-half 2024. Its assets under management, advisement and administration saw a CAGR of 9.7% over the same time frame.
The company's diversified products and revenue mix, strong global presence, solid AUM balance and strategic acquisitions reflect improving prospects. In December 2023, it acquired Altigo to expand in the alternatives investment space. In November 2023, the company acquired National Pensions Trust, which will likely enhance its position in the defined contribution market.
Notably, technology is the backbone of SEI Investments' businesses. The company's primary business platform — Investment Processing — delivers its outsourced software and processing services through TRUST 3000 and the SEI Wealth Platform ("SWP"). SEIC's 2021 strategic acquisitions, including Oranj's cloud-native technology platform, Finomial and Novus, support its technological advancement efforts.
The company launched two key technology enhancements through the SWP — Digital Account Open and Digital Model Management, which are available to independent advisors. In 2022, SEIC launched SEI Data Cloud through a 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 SEI Investments win clients and continue to support top-line growth.
In July 2024, SEIC announced an enhanced integration with Canoe Intelligence to boost operational efficiency for family offices via the SEI Archway Platform. This expanded relationship between both entities aims to automate the transmission of private equity and hedge fund valuations alongside private equity call and distribution data. In February, the company invested $10 million in TIFIN, a leading force in AI-driven wealth management innovation. The partnership is poised to reshape the landscape of wealth management through rapid exploration, market innovation access and talent development.
Over the past six months, SEIC shares have lost 2.4%. Over the past 60 days, the Zacks Consensus Estimate for the company's 2024 earnings has been revised 0.5% upward to $4.20 per share. SEIC currently carries a Zacks Rank #2.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Affiliated Managers: Headquartered in Massachusetts, this is a global asset manager with equity investments in a large group of investment management firms or affiliates. The company manages more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, alternative and fixed-income products. The company has a market cap of more than $5 billion. As of June 30, 2024, it had total AUM worth $701 billion.
Though AMG's consolidated revenues declined in the first half of 2024, in 2023 and 2022, owing to lower asset-based fees and performance-based fees, the metric witnessed a three-year (ended 2023) CAGR of almost 1%. Its portfolio of investment products provides a competitive edge when it comes to fulfilling the diverse needs of clients.
Moreover, with its strong balance sheet and liquidity position, the company has considerable capability to invest in other companies and generate meaningful growth through new investments. In May 2024, it acquired a minority stake in Suma Capital, marking the ninth private markets partnership. Last year, the company significantly diversified its business "in distinct fast-growing areas of private markets" by taking minority interests in Ara Partners and Forbion Group Holding B.V.
Through these, the company is reshaping its business profile with a focus on alternatives. Management noted that almost 50% of its earnings are being generated from alternative strategies (private markets and liquid alternatives), with the remaining "coming from differentiated long-only strategies."
In the last two years, divestitures of stakes in Veritable LP and Baring Private Equity Asia significantly bolstered the company's balance sheet position. It is targeting investments in alternatives, given the strong investor preference for the same.
AMG shares have gained 8.9% over the past six months. Over the past 60 days, the Zacks Consensus Estimate for its 2024 earnings has been revised 1.9% higher to $22.04 per share. The company currently carries a Zacks Rank #3 (Hold).
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
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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.