Stock Strategist Industry Reports

Reassessing Asset Managers' Moats

Greggory Warren, CFA

We’ve updated our economic moat and trend ratings for a handful of U.S.-based asset managers:  Invesco (IVZ),  Affiliated Managers Group (AMG),  Franklin Resources (BEN),  Eaton Vance (EV), and  Waddell & Reed Financial (WDR). This resulted in several downgrades, one upgrade, and a handful of changes in our fair value estimates. As we look at the industry today, we see a confluence of a few issues--poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel--that have made it increasingly difficult for asset managers that run predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe that there will be room for active management, we expect the advantage will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

Although most of the asset managers we cover have the size and scale to be competitive, we’ve taken a much deeper look at the switching costs and intangible assets we view as sources of economic moats for the industry. With Invesco, we maintained our narrow moat rating but took the trend rating (which is being influenced more by industry events) to negative and lowered our fair value estimate to $35 per share. We lowered our moat and trend ratings for Franklin Resources and Eaton Vance to narrow and negative and reduced our fair value estimates to $37 for Franklin and $55 for Eaton Vance. With Waddell & Reed, we changed our narrow moat rating to none with a negative trend and reduced our fair value estimate to $20. We actually lifted AMG’s moat rating to narrow, albeit with a negative trend, and lowered our fair value estimate to $200. In almost all cases, the reduction in fair value estimates reflects our assumption of a larger equity market decline (20%) than we were projecting previously (10%) midway through our five-year forecast.

Greggory Warren, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

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