Why 2020 and Future Years May Be Challenging for Asset Managers
When the stock market rises, most investors just assume that the value of financial stocks should rise along with it. After all, if the underlying value of assets under management is growing, then it should translate to higher management fees with little to no bump on expenses. If only things were that simple these days. Secular trends have eaten away at many traditional money management and asset management firms. The multi-decade race to zero in trading commissions has been one major change that affected many firms, but the move from mutual funds to exchange-traded funds (ETFs) has been a major change affecting many traditional asset managers. Even in the world of no-load mutual funds, which still have management fees, the overall expenses that investors take on each year frequently can be much lower by investing in ETFs rather than mutual funds.
Wells Fargo, which has at least some insight into financial market trends, has made some mixed calls on the traditional asset management sector to kick off 2020. Analyst Christopher Harris issued two upgrades, but there were more downgrades than upgrades in this sector call.
Harris downgraded several asset management firms. These firms, as well as others not covered in the downgrades, have faced longstanding industry price pressure and the long move toward lower-fee ETFs over mutual funds. Still, the two upgrades were against the grain.
BlackRock Inc. (NYSE: BLK) was upgraded to Overweight from Equal Weight and its target price was raised to $575 from $460. The prior closing price was $502.70. BlackRock has a $79 billion market cap and is among the largest ETF and investment managers. As of September 30, 2019, it managed approximately $6.96 trillion in global assets, and it houses the iShares ETF family and core BlackRock funds.
T. Rowe Price Group Inc. (NASDAQ: TROW) was raised to Overweight from Equal Weight, with a target price boost to $145 from $114. That compares with a $121.84 prior closing price. T. Rowe Price has assets of almost $1.2 trillion under management.
These were the asset management downgrades in the call:
Janus Henderson Group PLC (NYSE: JHG) was downgraded to Underweight from Equal Weight and the target price remained at $24.
Invesco Ltd. (NYSE: IVZ) was downgraded to Underweight from Equal Weight, with a target cut to $17.00 from $18.00.
Franklin Resources Inc. (NYSE: BEN) was downgraded to Underweight from Equal Weight and the price target cut to $25 from $29.
BrightSphere Investment Group Inc. (NYSE: BSIG) was downgraded to Equal Weight from Overweight, and Wells Fargo lowered the target price to $11 from $12. BrightSphere had assets under management of $216.8 billion at September 30, 2019, down from $225.0 billion just one quarter earlier.
The news and trends might not be all negative for asset managers, but even as assets grow from rising market values and from net investor inflows, there is still expected to be a long-term trend of compression on investment management fees for many firms. The big firms will continue to survive and thrive, but many asset management firms in the United States and internationally have significant ongoing revenue erosion risk ahead.