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Money management

Poor markets, investor uncertainty hitting firms’ stocks

Christopher Shutler
Christopher Shutler said volatile markets are making investors wary of manager stocks.

As a group, publicly traded money manager stocks have fallen around 25% since they peaked nearly 10 months ago.

And some of the reasons can be found in companies' year-end 2015 earnings reports: decreases in assets under management and flat revenue and profits are typical.

But it's more than a poor 2015 that is causing the stock price of asset managers to tumble, analysts said.

What is fueling the severe beating in the price of asset management stocks, they said, are investor concerns that things won't be getting better anytime soon for the companies.

“Investors are looking at 2016 and seeing that it's going to be difficult for these firms to grow assets under management,” said Erik Oja, an equity analyst with S&P Capital IQ in New York.

Mr. Oja said the ending of the equity bull market, concerns about rising interest rates and a continuing shift by investors to passive strategies all could limit money managers' AUM growth.

His analysis shows that publicly traded managers saw an overall 1.5% loss in AUM for 2015 compared with 2014. But some money managers have seen much larger declines; Franklin Resources Inc.'s assets under management dropped 13% year over year.

The decline in money management stock prices has been dramatic. The Russell 3000 Asset Management and Custodian index of 36 publicly traded asset managers and custodian banks returned -26.3% between April 28, 2015 (when the index reached a 6.5-year high) and Feb. 4, Bloomberg data show.

In contrast, the S&P 500 index returned -7.99% in that period.

Last month was particularly bad for asset management stocks, with markets hammered by plunging oil prices and ongoing concerns about China. Stocks in the Asset Management and Custodian index fell 10.89%. In contrast, the S&P 500 dropped 4.96%.

Affiliated Managers Inc. has seen one of the most striking share price declines. The Beverly, Mass.-based money management holding company has seen a 43.6% decline in its share price since April 28, when the stock reached a 6.5-year high, through Feb.4, Bloomberg data show.

In its Feb. 2 earnings report, the company reported total AUM of $611.3 billion as of Dec. 31, up 3% from three months earlier but down 1.4% from a year earlier. The results also included more than $6 billion in net outflows for the quarter. Revenue and net income also were down in the last quarter of 2015 from a year earlier.

AMG also has seen its stock price affected by problems at one of its boutique affiliates, Third Avenue Management LLC. Third Avenue announced in December it had halted redemptions in a credit fund and was liquidating remaining assets.

AMG Chairman and CEO Sean Healey insisted in the Feb. 2 earnings conference call with analysts that against the backdrop of uneven markets and lower returns, there is increasing client demand for high-conviction, actively managed strategies such as those offered by AMG affiliates.

“We are seeing strong demand for our affiliates' alternative strategies,” he said. “And as global institutional clients increasingly allocate toward active products more generally, AMG is well positioned to benefit from this trend.”

Tough markets

Recent poor overall stock market performance also has had an impact on investor sentiment toward asset management stocks, said Christopher Shutler, a Chicago-based equity analyst with William Blair & Co.

Because asset management companies invest in the stock market, a volatile market can make investors leery of money management stocks, he said.

“The asset managers have been a bit of a forward indicator of market sentiment, and I think showcase the fact that many investors are not enthused about putting money to work in the equity markets right now,“ he said.

Mr. Shutler said manager stock prices are falling because investors are pessimistic about the overall market in the near term. “I do feel like the stocks already imbed a pretty bad outcome,” he said. “The challenges are well known — be it oil or China or the presidential election coming up or the fact that we've been a bull market for so many years and arguably we are due for a correction.”

The price collapse of asset management stocks has left them “attractively priced,” said Lucas Montgomery, a New York-based vice president and senior research analyst with Sanford C. Bernstein & Co. The issue for publicly traded asset managers, Mr. Montgomery said, is “people are particularly worried about risk assets and that's what these guys invest in.”

“The problem with an asset manager (stock) is nobody can prove the market is not going to collapse or that there aren't going to be massive outflows,” he went on. “That's something that people are discounting more heavily today, given what people feel today about the economy and the way the market has been behaving. I think investors in general are focused on how they can be defensive. I feel with asset management firms there really isn't a way to be defensive.”

Declining assets under management year over year, whether from market drops or redemptions, have meant reductions in operating margins in what has been a high-margin business, said Mr. Shutler. “Margins are going to be down for the whole peer group of asset managers through 2016 unless the markets rebound,” he said.

Managers cautious

Even money management executives are being cautious about what will happen with the markets.

“We believe that global growth and financial market returns in 2016 will remain modest and that volatility will persist,” said William J. Stromberg, president and CEO of T. Rowe Price Group Inc., Baltimore, in a statement accompanying the company's earnings release on Jan. 28.

T. Rowe Price is one manager with assets that aren't shrinking. The company reported net inflows of $2.5 billion in the fourth quarter of 2015 and overall AUM of $763.1 billion, a 2% increase from the year-earlier date.

But net income for the quarter came to $303.2 million, down 4% from the fourth quarter of 2014, as the company reported higher expenses including compensation. Net revenue, meanwhile, totaled $1.05 billion, a 3% decrease from the year-earlier date.

Mr. Shutler lowered his 2016 earnings per share estimate of $4.20 by 9%, based on his expectations of lower revenue due to depressed overall market investment performance in January and the company's higher expenses from last quarter.

Mr. Shutler said while T. Rowe Price management is optimistic on future inflows, market volatility could have a near-term negative effect. He predicts the company's operating margin of 45.2% will shrink to 40.2% in 2016.

Shares of T. Rowe Price have fallen to $69.78 as of Feb. 4, a decline of 14.35% since Dec. 31, 2014.

Still, Mr. Shutler likes the stock: “We have an "outperform' rating on T. Rowe Price; we still like T. Rowe Price for patient, long-term investors.”

Robert Lee, a New York-based analyst and managing director with Keefe Bruyette & Woods Inc., favors shares of Invesco (IVZ) Ltd., the Atlanta-based global money manager, which saw net inflows of about $4 billion in the last three months of 2015.

“ Invesco has been generating organic growth because they have a diverse global platform,” Mr. Lee said. “They benefit from a broad base of strategies and global distribution. They are not overly dependent on just what U.S. equity flows are doing.”

Despite that positive assessment, Invesco's stock, which closed at $27.96 on Feb. 4, has fallen 29.3% since year-end 2014.

This article originally appeared in the February 8, 2016 print issue as, "Poor markets, investor uncertainty hitting firms' stocks".