BlackRock, Big Asset Managers Brace For Tough Quarter

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The traditional asset managers in Sterne Agee’s coverage will report sequentially lower EPS thanks to seasonally higher expenses, as well as fewer fee days in 1Q14.

Jason Weyeneth of Sterne Agee, in a research report dated April 2, 2014 on the subject of the traditional asset manager, notes that given the strength in equity markets for all of 2013, average equity assets are poised to be materially higher in 2014.

BlackRock and other asset managers to experience sequential EPS decline

The Sterne Agee analyst anticipates every traditional asset manager in his coverage list will show a sequential EPS decline, despite anticipated growth in average assets. The analyst points out that the substantial decline at Janus Capital Group Inc (NYSE:JNS) reflects a jump in the tax ratio (to mid 40%s), due to the expiration of out-of-the-money options.

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Drawing attention to specific names, the analyst points out the decline at BlackRock, Inc. (NYSE:BLK) reflects seasonally lower performance fees and likely lower non-operating investment marks. The decline at Waddell & Reed Financial, Inc. (NYSE:WDR) reflects lower investment gains as the analyst anticipates solid growth in operating earnings.

The following table captures the sequential EPS growth:

Sequential AUM growth

The analyst points out that in the path of equity market over the past 6 months, flow trends and fixed income market strength have likely driven average AUM growth. The analyst anticipates average asset growth overall, as higher average equity and fixed income markets will be further boosted by net inflows at many firms. The analyst believes Waddell & Reed Financial, Inc. (NYSE:WDR) would clock the best average AUM growth driven by sizeable equity market exposure and strong net flows. The analyst points out that for WisdomTree Investments, Inc. (NASDAQ:WETF), the decline in average AUM marks the first quarterly decline since 4Q11. Moreover, the modest growth at EV reflects its relative flow headwinds as well as its shifted fiscal calendar.

The following table highlights the sequential average AUM growth:

Sequential Average AUM Growth BlackRock

Solid long-term product organic growth

The Sterne Agee analyst anticipates generally strong organic growth reflecting seasonally strong retirement flows. The analyst points out that despite the fact that equity markets were volatile during 1Q14, industry flow trends remained solid which the analyst anticipates would translate into decent reported flows by the public asset managers. The following table captures the long-term flow expectations:

Long-term flow expectations BlackRock

The following table provides a snapshot of the Sterne Agee analyst’s price targets and EPS projections for various traditional asset managers falling under the analyst’s coverage universe:

asset managers Price targets and EPS projections BlackRock