These 10 Asset Management Firms Are Also Solid Stocks

Banks in general have underperformed the market for several years, but select investment banking firms have taken advantage of rising markets to boost their assets under management. Several contributors to MoneyShow.com think these wealth management firms remain worthy holdings in long-term portfolios. Scott Chan, The Complete Investor Lazard Ltd. is a financial advisory and asset management firm that operates in 27 countries globally; its services include mergers and acquisitions, restructuring, capital raising and structuring, shareholder advisory and various other financial matters. Ironically, for Lazard's financial services business, a bad economy may not be the worst thing. During rough times more companies have to restructure. On the other hand, when the economy is doing well more companies are likely to acquire smaller competitors. In that sense Lazard could see more demand when the economy is good or bad. Additionally, Lazard's equity investment strategy carries a heavy international bent. At least 67% of its assets under management (AUM) is invested in non-U.S. equities. We believe that equities of companies in emerging economies have more growth runway ahead of them, but they also tend to be more volatile than their U.S. counterparts. Still, despite the occasional rocky stock market, Lazard's asset-management business is more stable than financial services and has grown to be nearly 50% of revenue. Lazard won't be mistaken for a fast-growth stock. However, Lazard has also been consistently profitable, the exception being 2009 when the numbers across the finance industry were ugly. Kevin Heal, Argus Research We are initiating coverage of Raymond James Financial with a buy rating. The company's businesses provide capital markets, asset management, private client, banking and other services to individuals, corporations and municipalities. The company reported solid first-quarter fiscal 2019 results, with 12% growth in net revenue and 111% growth in EPS, driven by strength in the Private Client Group, Asset Management, and Raymond James Bank. In 1Q19, the company announced that it would acquire Silver Lane Partners, a boutique investment bank and one of the top-ranked firms in asset management and financial services M&A. The deal is expected to close by the end of April 2019. Looking ahead, we expect net interest income to increase as Raymond James Bank continues to grow and M&A revenues rise with acquisition of Silver Lane Partners. We also expect the company to remain in expansion mode as it brings additional advisers to its platform and makes strategic acquisitions that fit within its long-term plan. The shares are trading at 11.7 times our FY19 EPS estimate, below the low end of their historical range of 12-14. However, we believe a higher multiple is warranted based on the company's growth prospects. Our target price of $92 implies a multiple of 13 times our FY19 EPS estimate, in line with the historical average. We think that investors will continue to focus on the company's strategic acquisitions and plans to expand the number of advisers. George Putnam, The Turnaround Letter Investment management companies, which manage mutual funds and other investments on behalf of individuals, pensions and other clients, have fallen sharply out of favor. Historically, their shares would loosely track the broad stock market. But since 2014, they have diverged sharply. In just the past year, shares of many of these companies are down by 20%-50%. What's going on? First, and most important, the relentless shift toward index-based ETFs has drawn assets away from traditional managers. ETFs now account for $5 trillion in assets, much of which otherwise would be held by the traditional managers. Weak fund performance at many firms hasn't helped, either. Competition from ETFs has led to lower management fees, further pressuring managers' revenues. The steep market decline late last year not only reduced assets under management, but exacerbated investor worries about a recession and a subsequent stock market decline, especially after 10 years of prosperity. That caused more investors to step away from the investment managers' stocks. As contrarians, we think there is still good value in these companies. Many of their balance sheets are cash-laden, and cost-cutting has tempered the effects of weaker revenues. Some of the smaller firms might make enticing acquisition targets. Listed below are eight managers whose weak shares offer attractive valuations and dividend yields. Affiliated Managers Group Affiliated Managers' affiliate model allows it to take majority ownership of some of the industry's top investment firms. The company's capable leadership team oversees a diversified stable of managers of public and private equities, fixed income (bond) and alternative investments, while also providing global marketing support. Its revenue-sharing structure adds a stabilizer to AMG profits in weaker markets while keeping its managers motivated to produce strong returns. Its sturdy balance sheet and healthy cash flows offer opportunities for growth by further acquisitions. Franklin Resources With $650 billion in assets under management, including the venerable Templeton funds family, Franklin Resources is one of the largest publicly traded investment managers. The firm is well known for its deep research into local markets, illustrated by its 42 research offices around the world. While recent underperformance by many of its funds has hurt asset retention, Franklin Resources is buttressed by its large $5.9 billion (about $11/share) cash balance. The 40% stake held by the Johnson family likely precludes its sale, but shareholders are occasionally rewarded with sizable special dividends like the $3/share payout last February. Legg Mason Legg Mason operates as a group of nine independent, specialized investment managers across a range of fixed income, public and private equity and real estate strategies. Founded in 1899, the firm has $755 billion in assets under management with a sizable international component. The substantial fixed income business, at about 40% of revenues, provides stability against its more volatile equity products, while its expanding ETF offerings should help generate some growth. Part of Legg Mason's lackluster share price is offset by the $500 million a year it has returned to shareholders, including its recently increased dividend. Waddell & Reed Since its founding in 1937, Waddell & Reed has focused on selling its mutual funds through its network of company affiliated advisors. That business model has been losing traction, causing the company's asset base and EBITDA to shrink 36% and 49% respectively, over the past four years. However, recently improved investment returns along with stable revenues and lower costs have produced better operating profits. The company has nearly $9/share in net cash on the balance sheet. Trading at only 2.4 times EBITDA and paying a 5.7% dividend, Waddell & Reed shares could be an acquisition candidate or see a rebound if its profits continue to stabilize. Westwood Holdings Group Founded in 1983 by secretary turned investment manager Susan Byrne, Westwood Holdings oversees $21 billion in assets. The company's steady record of asset growth was interrupted last year, but remains poised to stabilize and potentially recover as its funds' performance has rebounded lately. Cost-cutting has softened the weaker revenue trends. The debt free balance sheet holds nearly $14/share in cash. Its generous 7.7% dividend yield is not quite covered by earnings, but the dividend recently was increased, indicating some confidence by the company that it won't need to be cut anytime soon. Crista Huff, Cabot Undervalued Stocks Advisor Blackstone Group LP is the world's largest and most diversified alternative asset manager with $472 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. Blackstone is an undervalued growth & income stock, and an excellent choice for dividend investors. The stock has been trading in a relatively flat line on the price chart since early February. The payout varies each quarter with the total of the last four announced payouts equaling $2.14 and yielding 6.4%. There's also a chance that Blackstone Group will announce a conversion from an LP to a C-corp, which would garner a very bullish reaction among investors. Buy now. Now that the risk of a pullback is diminished, I'm moving the stock from a Buy to a Strong Buy recommendation. There's significant price resistance near 38. Ben Reynolds, Sure Dividend Eaton Vance is an asset management firm based in Boston, Massachusetts and founded in 1924 with a $4.9 billion market cap. With offices in North America, Europe, Asia, and Australia, the company serves its clients by providing closed-end funds, mutual funds, term trusts, and ETFs (which trade under the NextShares name). Eaton Vance's competitive advantage lies in its appealing product offerings and low fees, which are allowing it to compete in an asset management industry experiencing significant fee compression. While most asset managers are experiencing net outflows due to the trend towards low-cost ETFs, Eaton Vance actually saw net inflows of $11.7 billion through the last four quarters. Eaton Vance is likely to generate earnings per share of about $3.36 in fiscal 2019. Using this estimate, the company is trading at a price-to-earnings ratio of 12.5. Eaton Vance traded at an average price-to-earnings ratio of 16 over the last decade. Eaton Vance is likely to generate 6% annualized earnings growth and pays a dividend that yields 3.3%. Overall, we believe that Eaton Vance could potentially deliver total returns of about 14.4% per year from current prices. Ameriprise Financial is an asset manager, with a market capitalization of $18 billion, approximately 14,000 employees, and more than $800 billion in assets under management (AUM). Its operating segments include Advice & Wealth Management, Asset Management, Annuities, and Protection (insurance products). The firm's biggest competitive advantage is its brand strength within the asset management industry. Strong financial performance is critical to retaining and growing its assets under management. That said, Ameriprise Financial is not immune to recessions. An economic downturn and resulting decline in the stock market would both be negative headwinds for AUM. Ameriprise would likely see its earnings decline during a recession but should remain profitable. Ameriprise's dividend appears to be highly secure. A fairly low payout ratio leaves plenty of room for Ameriprise's high rate of dividend increases to continue. Based on 2019 expected earnings per share of $15.30, Ameriprise stock currently trades for a price-to-earnings ratio of 8.6. The combination of valuation changes, 8% expected EPS growth, and the 2.7% dividend yield fuels expected annual returns of 18.5% over the next five years.

These 10 Asset Management Firms Are Also Solid Stocks

Wealth management firms remain worthy holdings for long-term portfolios.

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