Traditional asset managers are expected to clock higher EPS thanks to stronger fund returns and slightly better markets, note Morgan Stanley analysts.

Thomas Whitehead, Betsy L. Graseck and Elizabeth Elliot of Morgan Stanley in their report dated July 3, 2014 on “US Asset Managers” have revised their estimated EPS for traditional asset manager above consensus.

Ups asset managers EPS estimates

The Morgan Stanley analysts have enhanced their traditional asset manager EPS estimates by an average of ~1.5% for 2Q14 as depicted below. Their optimistic view largely reflects slightly stronger fund returns.

2Q14 estimates BlackRock EPS Estimates

Similarly the analysts have also enhanced their EPS estimates by an average of ~2% for CY 14-15e, as depicted below:

CY14-15e EPS BlackRock EPS Estimates

As set forth in the following table, the Morgan Stanley analysts also forecast ~1.5% average organic growth in 2014 while they anticipate ~3% growth in 2015, with Virtus Investment Partners Inc (NASDAQ:VRTS) top of group.

Fund flow dashboard BlackRock EPS Estimates asset managers

Prefer BlackRock and WisdomTree Investments

The analysts retained their overweight on BlackRock, Inc. (NYSE:BLK) and WisdomTree Investments, Inc. (NASDAQ:WETF), while heading into 2Q earnings, they are equal-weight over AllianceBernstein Holding LP (NYSE:AB), Invesco Ltd. (NYSE:IVZ) and Virtus Investment Partners Inc (NASDAQ:VRTS). The following table captures the analysts’ comparables summary of US traditional asset managers:

Comparables summary BlackRock EPS Estimates

Focusing on individual asset managers, the report highlights that BlackRock Inc is well positioned in the current landscape given their iShares platform, multi-asset & alts. The analysts anticipate BlackRock, Inc. (NYSE:BLK) to clock 13% 2013-15e EPS CAGR aided by ~4% organic growth and continued operating margin expansion. The Morgan Stanley analysts also anticipate iShares ETF AuM CAGR of 17% from 2013-15e, which will drive substantial operating leverage and ~$9 EPS by 2015. The following table summarizes the analysts’ rationale for BlackRock :

Rationale for BlackRock EPS Estimates

Asset managers – SIFI designation a possible red-flag for BlackRock

The Morgan Stanley analysts however note regulatory uncertainly such as MMF reform, SIFI designation could act as possible red-flag for BlackRock.

Turning their focus on the other over-weighted asset manager WisdomTree Investments, Inc. (NASDAQ:WETF), the Morgan Stanley analysts anticipate WETF AuM CAGR of ~20% in 2013-16e, as it continues to take share of the rapidly growing ETF industry. Moreover, they anticipate WETF has the ability to expand operating margins with economies of scale and successful fund launches. However, the analysts note WETF could face possible risk due to extreme overall equity market performance, especially in international markets including Japan, Europe, EM. The following table captures the analysts’ view on WETF:

Rationale for WisdomTree Investments