More Asset Managers Providing Monthly AUM Is a Good Thing
BlackRock and T. Rowe Price remain our top picks in the space.
We’re pleased to see the number of U.S.-based asset managers we cover that provide preliminary monthly data on assets under management increase from five to seven. Since the start of the third quarter, T. Rowe Price (TROW) and Waddell & Reed Financial (WDR) have joined Invesco (IVZ), Franklin Resources (BEN), Legg Mason (LM), AllianceBernstein (AB), and Cohen & Steers (CNS), with Eaton Vance (EV) offering preliminary AUM data each calendar quarter.
How long this will last is anybody’s guess, but we believe that in both companies’ cases the decision to start releasing monthly figures was a reaction to market misperceptions about their AUM levels and flows, primarily related to the disruption caused by the Department of Labor’s fiduciary rule.
While we would like to see BlackRock (BLK) and Affiliated Managers Group (AMG) provide monthly data as well, given that they do a lot of business with institutional clients, we’ve never gotten the sense that either company would be willing to go that route. Federated Investors (FII) and Janus Henderson Group (JHG) are the only other holdouts when it comes to monthly AUM data, but because they are far more retail driven, we’ve generally been able to back into their results.
As for the data itself, rising equity markets continue to benefit most of the U.S.-based asset managers, with AUM levels up around 9% on a weighted average basis since the start of the year at the end of July. While this should be viewed as a positive, it does highlight the poor organic growth environment, with the S&P 500 Index up about the same amount year to date. The real winners have been BlackRock, T. Rowe Price, AMG, and Eaton Vance, all of which have seen double-digit AUM gains since the start of the year.
With fees and margins for active managers expected to be under pressure as low-cost passive investing continues to gain traction, we recommend BlackRock, the leading provider of exchange-traded funds, and T. Rowe Price, which has the best and most consistent active investment performance, for long-term investors.
BlackRock is at its core a passive investor. Through its iShares exchange-traded fund platform and institutional index fund offerings, the wide-moat firm sources close to two thirds of its managed assets from passive products. In an environment where investors are expected to seek out providers of passive products, as well as active asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees, we like how BlackRock is positioned. The biggest differentiators for the company are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees.
We believe BlackRock’s iShares ETF franchise, augmented by a technology platform that offers risk management and product/portfolio construction tools directly to end users, making them stickier in the long run, should allow the company to generate higher and more stable levels of organic growth than its publicly traded peers over the next five years. With BlackRock producing better and less volatile AUM, revenue, and profitability growth, as well as having less execution risk, it should continue to garner a premium valuation. We expect the firm to generate high-single-digit rates of earnings per share growth over the next five years, with total returns ending up in the low double digits.
BlackRock’s shares are trading at 90% of our $475 fair value estimate (which includes the potential impact of U.S. corporate tax reform), below the average price/fair value estimate ratio (of 98%) for the group. Our tax-adjusted fair value estimate for BlackRock implies a price/earnings multiple of 21.8 times our 2017 earnings estimate and 19.0 times our 2018 earnings estimate. While this is above the 18.2 average and 18.5 median trailing price/earnings multiple the company traded at during 2012-16, it is basically in line with the 21.3 average and 19.2 median trailing price/earnings multiple BlackRock has garnered over the past 10 years.
As for T. Rowe Price, the company has never tried to be, and has never needed to be, anything other than an active manager. In an environment where active management is under assault for poor investment performance and high fees, the wide-moat firm is the best positioned among the traditional active asset managers we cover. The biggest differentiators for T. Rowe Price are its scale, the stickiness of its asset base, strong brand identity, consistently solid long-term investment performance, and reasonable fees.
While the company will face headwinds in the near to medium term as the baby boomer rollover phenomenon affects the organic growth it derives from the defined-contribution channel, we think T. Rowe Price and defined-contribution plans in general have a compelling cost and service argument to make to pending retirees, which should mitigate some of the impact. We also believe T. Rowe Price is uniquely positioned among the companies we cover (as well as the broader universe of active asset managers) to pick up business in the retail-advised channel, an area of the market that the company has not focused too heavily on in the past, given the solid long-term performance of its funds and reasonableness of its fees.
T. Rowe Price’s shares are trading at 95% of our $88 fair value estimate (which includes the potential impact of U.S. corporate tax reform), only slightly below the average price/fair value estimate ratio (of 98%) for the group. Our tax-adjusted fair value estimate for T. Rowe Price implies a price/earnings multiple of 16.9 times our 2017 earnings estimate and 16.3 times our 2018 earnings estimate. This is below the 18.7 average and 19.2 median trailing price/earnings multiple the company traded at during 2012-16, as well as the 21.6 average and 19.5 median trailing price/earnings multiple T. Rowe Price seen over the past 10 years.
We believe this discount is warranted, given the headwinds the firm will face from rollovers as a growing number of baby boomers reach retirement age during the next decade. That said, we still believe T. Rowe Price deserves a premium to the group, given that it not only is the best-positioned active manager we cover but ranks among the best positioned of the entire universe of U.S.-based asset managers (public and private).
Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.