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7 July 2017
Americas/United States
Equity Research
Asset Managers
US Traditional Asset Managers
– 2Q17 Preview
SECTOR REVIEWResearch AnalystsCraig Siegenthaler, CFA
212 325 3104
craig.siegenthaler@credit-suisse
Ari Ghosh
212 325 7113
ari.ghosh@credit-suisse
Jordan Friedlander
212 325 3184
jordan.friedlander@credit-suisse
Expect Solid Results and Continued
Improvement into 2H17 – BLK Top Long
In 2Q17 results over the next month, we generally expect (1) better than
expected/improved net flows (especially considering negative seasonality q/q),
(2) higher AuM balances and revenues (strong market backdrop + 1 extra
day), (3) improved operating margins (aided by revenue lift), and (4) better
than expected EPS results (including some positive contribution from non-
operating income). 2Q17 net flows/fee rates are especially positive when you
consider where market expectations were 6-12 months ago given the first DOL
Rule implementation deadline of April 2017 (delayed to June '17). However, as
we wrote about in
Darkest Before Dawn
on May 4, we look for flows/fees to
trend better than market expectations in 2017 and expect the pace of the three
secular rotations (active-to-passive, high to low fee, MF to ETF/SMA) to slow
in 2018 in the US (but accelerate outside of the US given FCA Review in UK,
MiFID2 in EU, and future regulations). Note: ETFs are also stealing share from
single securities in investor portfolios including institutional investors
(insurance companies) and retail investors, which can provide new sources of
growth that are outside of the active managers. We have revised estimates
and target prices across our coverage. Please refer to Figure 8.
■
Macro:
Excluding LATAM, all major global equity markets generated strong
returns again in 2Q17, with EM and Europe leading the US. Bond returns
were broadly positive across the board with all major categories generating
positive returns (including US, Global and High Yield). Global economic
activity modestly underperformed expectations in the US, with “hard” data
softening with lower prospects for fiscal stimulus and de-regulation.
■
Flows:
Industry flow trends remained consistent – with inflows into
ETFs/passive and active fixed income, but negative into active equities.
However, active equity flows did improve q/q (despite negative
seasonality), and are tracking better than our initial forecasts (fee rates
trending better too). We continue to believe 2017 will contain peak negative
activity for traditional managers (active-to-passive rotation, high to low fee
shift, frequency of fee cuts), and expect these levels to slow in 2018-19 as
passive share of equity assets reach 50% in the US next year.
■
LT Industry View:
We have a mixed 12-month view of the traditional
managers driven by (1) several secular headwinds to flows in traditional
product classes (active equities), (2) elevated risk of free pressure, and (3)
risk of new regulations (especially in Europe) that focus on consumer
protection and generally encourage investors to shift funds into low cost
index products. However, the US asset manager stocks are cheap relative
to their history and long-only investors are generally underweight which
could lead to better than expected stock performance. We forecast a 5-
10% total return for the average traditional stock over the next 12 months
(includes dividends).
7 July 2017
US Traditional Asset Managers – 2Q17 Preview■
LT Stock Views:
Our thesis on BLK (OP) is driven by our high organic
AuM/EPS growth forecast which is supported by its industry leading ETF
business. We are also positive on WETF (OP) which has seen a reversal in
its net outflows (mostly driven by currency hedged) and is now seeing
inflows in 2Q17 (driven by US equities). While we are slightly less positive
on the multi-managers now (LM, AMG, OMAM) given strong performance
in their share prices (and modestly higher/improving valuations), we still
rate all three Outperform, but prefer the OMAM stock now given its lower
valuation and improving fee rate and higher incremental margins (which
drives a faster EBITDA growth rate).
■
2Q17 Results:
We expect a strong quarter for BLK (EPS beat, strong net
flows) and believe its fee rate may show signs of stabilization given a
strong beta & FX backdrop. JHG (improving net flows) will benefit from the
positive inflection point in Henderson’s retail flows, while all eyes will be on
INTECH (we think its net redemptions may improve modestly q/q given
stronger relative performance in its key funds YTD). We are cautious on
APAM, BEN, MN and WDR as we expect negative flows (though improving
at BEN and WDR); however, we look for large earnings beats at TROW,
and AB in 2Q. Also, while TROW had weak April US MF flows, its flow
improved in May and June.
7 July 2017
US Traditional Asset Managers – 2Q17 Preview2Q17 Themes/Conclusions
Figure 1: Cumulative US Retail Equity Flows ($,B): Figure 2: Cumulative US Retail Bond Flows ($,B)
-600
-500
-400
-300
-200
-100100
200
300
400
Active EquityPassive Equity MFPassive Equity ETF
-50
-2525
50
75
100
125
150
Active BondPassive Bond MFPassive Bond ETF
Source: Credit Suisse Asset Manager Research, Simfund, Active Equity includes active MF + active ETFSource: Credit Suisse Asset Manager Research, Simfund, Active Bond includes active MF + active ETF
Macro
■Equity market returns were strong for the most part in 2Q17 (ex-Latin America), with
US indices up for the quarter while EM and European equities outpaced domestic
equity returns (on a point to point basis). Fixed income returns were positive across the
board, with all major categories including core US bonds, EM, high yield and munis
generating positive returns. Industry flows were positive into ETFs/passive and active
fixed income, but negative into active equities and money market funds. We expect the
negative flows in active equities to continue but to slow in 2018-19. We estimate 2Q17
public asset manager flows at -1.0% organic growth (ann.), which while negative and
below 1Q17 (-0.6%), isn't that bad given the dual headwinds of DOL implementation
and negative seasonality (tax season + drop-off of 401k inflows in 1Q). While organic
growth trends continue to look weak for the group, we believe that the stocks now
reflect a slightly more positive outlook as the group has rallied 9% on average over the
past three months compared to +3% for the S&P500 and +7% for the US financial
sector. We estimate much of the outperformance YTD has been driven by (1) hedge
fund short covering, and (2) long-only allocations increasing from underweight.
Stocks
■
BLK (Outperform) –
we expect an EPS beat and are projecting very strong flows in
2Q17 (and for full year 2017) driven by $70B+ of iShares inflows (~$50B Equity/$20B
Fixed Income) with more than half of the inflows originating from outside of its core
series ETFs (very low fee). We continue to see our BLK retail land grab thesis playing
out with Global iShares crossing the annual $100B net flow mark already in June (vs.
October in 2016 and November in 2015). We also expect BLK's 2Q17 fee rate to
stabilize given a more positive backdrop (FX, divergent beta) and also note that we
believe BLK's retail (~60bps) and ETF (~30bps) segments will drive future growth and
both segments are more profitable than BLK's slower growth institutional segment and
overall business (~19bps). BLK remains our top traditional long.
■
LM (Outperform) –
we believe LM will report a GAAP earnings miss and net flows will
turn slightly negative. However, we estimate there are about $0.35-0.40 of one-time
items that are weighing LM's GAAP earnings. After stripping out these items, we
7 July 2017
US Traditional Asset Managers – 2Q17 Previewestimate earnings and net flows will probably trend close to market expectations. The
unusual items include a $34M RARE impairment charge, $12M of accelerated comp
related to retirement packages, which is offset partially by $11.5M of earnout
adjustments from RARE. These items net to ~35-40c of negative charges.
■
TROW (Neutral) –
we expect an earnings beat but negative net flows. However, we
estimate flows may come in above market expectations and could improve slightly y/y.
We estimate a strong revenue backdrop (beta driven) and improving operating margin
(despite expense growth/heavy investing) will all help contribute to the beat (including
some benefit from non-op too). While we estimate that TROW saw negative US retail
flows in April, we project that US retail flows have since inflected positively in May and
June (preliminary).
■
AMG (Outperform) -
we expect a small EPS beat and modest net inflows for 2Q17
(AMG's first positive flow quarter since 3Q16). While we estimate an improvement in
organic growth over the next 6-9 months, driven by the firm's ~$10B PE fund raising
cycle, we also expect AMG's 4Qs to contain net outflows given its underlying
seasonality.
■We expect negative/weak net flows for APAM (Neutral), BEN (Underperform),JHG
(Neutral), MN (Neutral) and WDR (Underperform). Alternatively, we look for
positive/improved flows at CNS (Neutral), EV (Neutral) and WETF (Outperform).
Additionally, we look for messy P&L quarters from JHG and VRTS (merger-related),
but Ari sees meaningful upside to VRTS's LT earnings power relative to consensus
expectations due to the RidgeWorth acquisition. Also, while we remain cautious on the
business models which have a higher composition of commission-based/brokerage
business, we continue to believe BEN and WDR will be impacted by the significant
changes to the US retail channel (active-to-passive, fee pressure, death of A/C share
classes, commission-based to advisory…).
Figure 3: US ETF Flows – 2Q TrendsFigure 4: US ETF Flows – Annual Trends
-101030
40
50
60
70
Q2'13Q2'14Q2'15Q2'16Q2'17 TD
VanguardBlackRockTotal50
100
150
200
250
300
2013201420152016Ytd-5/17
VanguardBlackRockTotal
Source: Credit Suisse Asset Manager Research, SimfundSource: Credit Suisse Asset Manager Research, Simfund
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