Stocks of traditional asset management companies have been slow movers compared to the broad market measured by the S&P 500 (INDEXSP:.INX) during the year so far. In fact, with the exception of banks, the performance of traditional asset managers has lagged most financial sub-sectors.
“While absolute valuations are near long-term averages, the relative multiple of the group versus the S&P sits at roughly a 20 percentage point discount to the 10 year average and nearly lows,” remarks Stern Agee analyst Jason Weyeneth in his 2Q 14 Preview of Traditional Asset Managers of July 8, 2014.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
What could change
According to the analyst, the robust equity markets could lead to materially higher equity asset growth sequentially at these companies during 2014.
What’s more, quarterly EPS is also expected to grow strongly due to factors such as higher average AUM, a better fee performance due to seasonal factors, and control on costs – all contributing to drive better margins in Q2.
On a note of caution, specific companies could suffer one-time hits such as debt refinancing losses [Legg Mason Inc (NYSE:LM)] or GAAP taxes [WisdomTree Investments, Inc.(NASDAQ:WETF), first quarter].
During the second quarter, “we look for the best average AUM growth from Waddell & Reed Financial, Inc. (NYSE:WDR) driven by sizeable equity market exposure, solid net flows, and 1Q14 ending AUM that was 2% above the 1Q14 average,” says Weyeneth.
Compelling asset managers relative valuations
According to the analysts, though absolute valuations currently hover around 16.2 times forward twelve-month earnings (close enough to the 10 year historical median of 16.4 X), relative valuations, when compared with S&P 500 multiple, are sitting at a 10 year low.
“We believe there is a fairly attractive opportunity for the traditional asset managers as a group if equity markets remain stable/upward trending and equity fund flows can remain positive,” says Sterne Agee.
Reratings and revised price targets
Sterne Agee have upgraded WisdomTree Investments, Inc.(NASDAQ:WETF), Waddell & Reed Financial, Inc.(NYSE:WDR) and Eaton Vance Corp(NYSE:EV) to a Buy rating.
The three companies have upside potential of 38%, 26% and 16% respectively, as shown in the table below.
WDR: Related news
Waddell & Reed Financial, Inc.(NYSE:WDR) also found favor with analysts William Blair who initiated coverage yesterday with an Outperform rating, citing the recent fall in its stock price and speculating on the possibility of an attractive special dividend.
It may be noted that during the company’s latest conference call, when asked to comment on the likelihood of the return of excess capital to shareholders, CEO Henry Herrmann said that both share buybacks and dividends played important roles in the company’s capital management strategy. “Every once in a while a special dividend will play into things,” he remarked. “Obviously our share price action might encourage me to be a little bit more aggressive toward equity purchases and a really steep decline might really encourage me.”
Waddell & Reed Financial, Inc.(NYSE:WDR) is currently trading at $63.19, up 0.93%.