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Investment Management Industry Near-Term Outlook Seems Bright

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The Zacks Investment Management industry consists of companies, which manage securities and funds of clients to meet specified investment goals, and earn by charging service fees or commissions. Investment managers are also called asset managers as they manage hedge funds, mutual funds, private equity, venture capital and other financial investments for third parties.

By appointing an investment manager for one’s assets, investors get more diversification options than they would have by themselves. The diversification helps in reducing volatility, and hence ensures steady returns over time, as investment managers invest clients’ assets in different asset classes, depending on their need and risk-taking ability.

Some of the prominent names in this industry are Affiliated Managers Group, Inc (AMG - Free Report) , Ameriprise Financial, Inc (AMP - Free Report) , Franklin Resources, Inc (BEN - Free Report) , BlackRock, Inc (BLK - Free Report) , Invesco Ltd. (IVZ - Free Report) , T. Rowe Price Group, Inc (TROW - Free Report) and Principal Financial Group, Inc (PFG - Free Report) .

Here are the industry’s three major themes:

 

  • The equity markets have lately been witnessing some volatility, due to the continued uncertainty related to the U.S.-China trade war along with several other geopolitical headwinds. So far in 2019, some industry players have witnessed asset outflows in most of the months, while some have experienced active equity inflows. Thus, despite persistent outflows, growth in assets under management (AUM) is expected to continue in the near term, driven by expectations of speedy resolution of the above-mentioned concerns. With the majority of asset managers’ revenues coming from performance fees and investment advisory fees, this is expected to support top line growth.
     
  • As investors look for low-cost investment strategies, the demand for passive investing is on the rise. Last year, many investors shifted preference from active to passive management. The same is expected to continue in 2019. Because of the continued shift to institutional investment in lower-cost passive mandates from the more-profitable active strategies, margins of asset managers are likely to be under pressure.
     
  • The tightening of regulations to increase transparency has led to a rise in compliance costs for investment managers. Moreover, as wealth managers are trying to upgrade technology to keep up with evolving customer needs, technology costs are expected to continue rising. These are likely to increase overall expenses.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Investment Management industry is a 50-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #86, which places it at the top 34% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags on Stock Market Performance

The Zacks Investment Management industry has underperformed both the S&P 500 composite and its sector over the past two years.

While the stocks in this industry have collectively lost almost 18.8% over the same period, the Zacks S&P 500 composite has rallied 17.8% and the Zacks Finance sector has gained 2.5%.



Two-Year Price Performance



 

 

Industry’s Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing finance companies because of large variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 2.95X. This compares with the highest level of 3.40X, the lowest level of 1.52X and median of 2.68X over the past five years. Additionally, the industry is trading at a significant discount when compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 13.78X, which the chart below shows.



Price-to-Tangible Book Ratio (TTM)



 

 

As finance stocks typically have a low P/TBV ratio, comparing investment managers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 3.92X for the same period is above the Zacks Investment Management industry’s ratio, as the chart below shows.



Price-to-Tangible Book Ratio (TTM)



 

 

Bottom Line

While margin compression, and escalating compliance and technology costs are expected to hurt investment managers’ profits in the near term, continued growth in AUM will likely aid in revenue generation.

One should particularly consider betting on investment management stocks that depict an upbeat earnings outlook. We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and two with a Zacks Rank #2 (Buy) that investors may consider betting on.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Cohen & Steers, Inc. (CNS - Free Report) : The stock of the New York-based company has gained 74.3% over the past year. The Zacks Consensus Estimate for the company’s 2019 earnings has increased 3.7% over the past 60 days. The stock currently sports a Zacks Rank #1.



Price and Consensus: CNS




 

 

Virtus Investment Partners, Inc. (VRTS - Free Report) : The stock of this Hartford-based company has gained 12.4% over the past year. The Zacks Consensus Estimate for the company’s current year earnings has been revised 3.8% upward over the past 60 days. The stock currently sports a Zacks Rank of 1.



Price and Consensus: VRTS




 

 

Legg Mason, Inc. (LM - Free Report) : The stock of the Baltimore-based company has gained 34.4% over the past year. The Zacks Consensus Estimate for the company’s current fiscal year’s earnings has been revised 6.5% upward over the past 60 days. The stock currently carries a Zacks Rank of 2.



Price and Consensus: LM




 

 

Federated Investors, Inc. (FII - Free Report) : The stock of the Pittsburgh-based company has gained 36.1% over the past year. The consensus estimate for the company’s 2019 earnings has been revised 4% upward over the past 60 days. The stock currently carries a Zacks Rank #2.



Price and Consensus: FII



 

 

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