Citi Analysts William R Katz, Neil Stratton and Steven J Fullerton estimate how Broker Dealers and Asset Managers could fare in the third quarter of 2013 in their research report of October 7, 2013.

This article covers their views on the three-sub-sectors, that is, Alternative Asset Managers, Traditional Asset Managers and Broker Dealers in the above space, and four stocks that they particularly favor within it.

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Alternative Asset Managers

Outlook

Of the three sub-sectors, Citi is most bullish on Alternative Asset Managers for Q3. Alternative managers are expected to report strong gross sales on a sequential quarter as well as year-on-year basis, driven by solid growth in assets under management. Growth in AUM could be fueled by globalization, diversification, improved allocations and gains in market share. Retail growth is likely to be another tailwind for this sub-sector.

These asset managers are also expected to provide encouraging insight into Q4 and 2014 earnings.

Companies are also expected to take full advantage of healthy operating leverage to boost earnings.

To top it all, Citi estimates that alternatives could still deliver favorable Expected Total Return (see table above) over the coming 12 months, despite their strong showing year to date.

Citi expects a median Expected Total Return over 12 months of 21%.

Focus Stocks amongst Alternative Asset Managers

The Blackstone Group L.P. (NYSE:BX):  The asset manager is strongly favored for its likely performance this quarter, primarily for ‘best in class’ growth in assets across private equity, real estate and Blackstone asset management.  Though Q3 could be comparatively soft, Q4 outlook is expected to be robust. The realizations from Blackstone Capital Partners V L.P. (expected returns 15-16% p.a.) could boost estimates for 2015 and favorably affect valuations.

Och-Ziff Capital Management Group LLC (NYSE:OZM):  OZM is favored for impressive recent growth in AUM, flattening expenses and stronger operating leverage going into 2014 – all implying solid earnings in 2014. Citi also say Q4 dividend distribution could be $0.66, a yield of 6% quarterly.

Traditional Asset Managers

Outlook

Citi is somewhat lukewarm to this class, primarily due to its sizable run up till date and low expectations of an improvement in fund inflow in subsequent quarters. With uneven performance expected from its constituents, Citi say “organic growth may prove underwhelming.” Yet, possibilities remain for an improvement in funds flow by the end of the year and going into 2014 – which is why Citi is cautiously looking for better entry points into this sub-sector.

Citi expects a median Expected Total Return over 12 months of 7.1%.

Focus Stock amongst Traditional Asset Managers

Invesco Ltd. (NYSE:IVZ): Citi like this stock into Q3 primarily because it continues to trade at a multiple discount compared to the peer median, and therefore expect expansion of multiples. Inflows are expected to be comparatively better than its peers, and incremental margins could be 60% plus. IVZ could therefore beat Q3 EPS estimates.

Broker Dealers

Outlook

Citi views this sub-sector to be in more of a consolidation mode, while short-term rate uncertainties prevail. Rates are going to be lower for longer, according to Citi. There is also the likelihood of downward estimate revisions for 2014-15 presently assumed by the market.

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Citi expects a median Expected Total Return over 12 months of 17.4%.

Focus Stock amongst Broker Dealers

LPL Financial Holdings Inc (NASDAQ:LPLA):  LPLA is favored because Citi feel a taper in spending could be accompanied by better revenues. Despite a better earnings picture for 2Q13, the stock has underperformed peers and capital returns could be robust over the next year.