A July 1st report from Morgan Stanley Research highlights that traditional asset managers have done well by and large in 2015, with BlackRock leading the way with a 3% annualized return so far this year.
As far as the rest of the pack, according to Morgan Stanley’s Betsy L. Graseck and Sean R. Haydon, Invesco, T. Rowe Price Group and OM Asset Management are producing 1.2%-1.4% returns year to date and Franklin Resources is at the bottom of the heap with a projected annualized return of -0.3%.
The MS analysts also note they are raising their estimates for the sector: “We’re raising our traditional asset manager EPS estimates by a median of 2% for 2Q15 and keeping ests unchanged for FY15, largely to reflect strong markets globally during the second quarter.These revisions leave us +2% above consensus for 2015 for the group and +1% above consensus for 2Q15.”
Key second quarter catalysts
Graseck and Haydon identify three key catalysts that they expect to impact the asset manager sector over the next few months.
- First, “expect Solutions and Target Date flows to accelerate as equity markets perform and low European rates generate more interest in multi-strategy product. More freezing of defined benefit pension plans pulling allocations out of equities and into fixed income or Liability-Driven Investments (LDI).” They highlight that Blackrock and T. Rowe Price Group are best positioned to take advantage of this trend.
- Also note that ongoing sovereign turmoil in Greece, Puerto Rico and elsewhere may drive incremental flight to quality towards U.S. and Asia-Pacific securities. The analysts point to Blackrock, T. Rowe Price Group and OM Asset Management as best positioned.
- Third, given that total bond mutual fund flows decelerated throughout the quarter and moved to outflows in June, anticipate investors asking management how they are managing redemption risk. Blackrock and Invesco are apparently best positioned to deal with this situation.
Morgan Stanley is overweight on Blackrock and OM Management
Graseck and Haydon highlight that Blackrock is well positioned, given its “industry-leading ETF platform, multi-asset/retirement footprint (largest DCIO player), & alts presence. Expect structural legs to Fixed Income ETFgrowth as fixed income fund managers are increasingly incented to hold more liquidity ahead of rate rises due to rising redemption, gap and regulatory risk. We expect part of this need for higher liquidity will be funded by fixed income ETFs which provide liquidity ex-extremis to fund redemptions. We expect these factors will drive organic growth, margin expansion & EPS growth at high end of peers and maintain BLK’s premium to peers.”
The MS team believes that OM Management has made the right moves and is likely to re-rate closer to the sector multiple. They argue that probable catalysts for OM include building out its global distribution platform (that is just two years old and already contributing close to 12% of sales) and carrying out its M&A strategy. There is also the likelihood of more secondaries from OM, which could offer an opportunity to pick up some shares at a good price.
