Equity Market Gains Not Lifting All Asset Manager Boats
Poor investment performance and rising interest rates have exposed weaknesses in several asset managers.
Rising equity markets tend to cover up all manner of sins. Concerns about weak organic growth, poor investment fund performance, or rising expense ratios can get cast aside as assets under management rise and higher-fee-generating equity funds contribute to top-line results. That said, rising equity markets can undermine an asset manager's competitive position when its fund performance has been weak for an extended period and market gains are not being fully reflected in the performance of its funds, as Janus Capital Group (JNS) has experienced this year, with outflows from its fundamental equity funds accelerating. Meanwhile, the prospect of rising interest rates as the Fed tapers its asset-repurchase program has put additional pressure on firms that have seen greater amounts of growth from fixed income over the past five years, like Franklin Resources (BEN) and AllianceBernstein (AB). Not surprisingly, these three firms are currently trading at the lowest price/earnings multiples of the asset managers we cover, with Franklin Resources at the lowest price/fair value estimate overall. Still, we think Franklin Resources holds the best position, with its wide economic moat built on the scale of its operations, the strength of its brands, and the diversity of its assets under management.
Market Pullback Sours Improving Picture for Actively Managed U.S. Equity Funds
While July was a welcome respite for active managers of U.S. equities, as the market climbed more than 5% and monthly flows turned positive again, the euphoria was short-lived, with the S&P 500 TR Index declining 2% since the start of August and actively managed U.S. equity funds going back into net redemption mode. We expect the flow picture to be a bit more subdued for active U.S. equity managers in the back half of 2013, owing to the trend that has been in place over the past 20 years of investor flows during the first half of any given year outstripping those recorded in the back half of the same year. While this is more troubling for the equity-heavy asset managers we cover--namely, Janus, Waddell & Reed (WDR), and GAMCO Investors (GBL), which remain overly reliant on market gains to lift their AUM levels--it will have an impact on the actively managed U.S equity operations of all of our asset managers.
Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.