After a year of mostly steady growth, traditional asset managers have seen organic growth slow or even decline in December with no clear bounce back so far in January and equity flows becoming mixed, meaning that alternatives may have a better upside for the beginning of 2014.
Asset managers may be vulnerable to a correction
“Asset Managers enjoyed a significant re-rating over the last six to twelve months on the hopes of rising organic growth prospects and mix shift toward equities,” writes Citi analyst William R. Katz. “We believe such bullishness may begin to break down – and Traditionals may be vulnerable to a correction – as underlying organic growth data appear mixed.”
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Annualized equity flows go negative
Looking at available monthly corporate data (not everyone releases monthly numbers), Katz estimates that asset managers lost an annualized 1% in December, compared to 1-2% annualized growth in November and roughly flat growth in October, even when PE multiples are expanding for the sector overall. Equity flows were also flat in December, compared to 4% inflows in November, despite a general bullishness toward the stock market in 2014 even after a solid year of ratings growth.
Fixed income outflows were 4% to 2% last month. Legg Mason actually reported positive fixed income flows in December, the only company with monthly reports to do so, while other asset managers attrition rates for fixed income products ease up considerably.
“We are most bullish on Alternative Managers reflecting highest upside to targets, strong(er) flow dynamics, leverage to realization cycle, and expectation for 4Q [estimated net inflows] beats to consensus,” writes Katz. “We believe investors are discounting an uptick in organic growth trends but incoming data are mixed and Traditionals could be subject to a correction given elevated multiples and prices moving beyond our estimate of fair value.”
APAM and BEN lead the pack
Katz estimates that Artisan Partners Asset Management Inc (NYSE:APAM) and Franklin Resources, Inc. (NYSE:BEN) each had 1-2% annualized organic growth in December, while the industry average was pulled down by AllianceBernstein Holding LP (NYSE:AB), Invesco Ltd. (NYSE:IVZ), and Legg Mason Inc (NYSE:LM) which each lost about 2% annualized. He notes that Invesco appears to have lost more in its low fee, passive accounts, so other accounts may have seen flat or positive growth.