瑞士信贷--美国资产管理行业研究报告2007年

2564

收藏 2008-06-13

U.S. Asset Management INITIATION Initiation ■ We are initiating coverage of the U.S. Asset Management Sector with an Overweight position, launching coverage on a total of 13 companies, with Outperform ratings on INVESCO, Fortress Investment Group, Franklin Resources, T. Rowe Price, AllianceBernstein, and Affiliated Managers Group, and Neutral ratings on BlackRock, Calamos, Eaton Vance, Federated Investors, Janus, Legg Mason, and Waddell &amp; Reed. ■ Our best value idea is INVESCO; performance consistency at a reasonable price is T. Rowe Price; best absolute growth idea is Fortress; and our favorite globally positioned stock ideas are Alliance and Franklin. ■ What separates asset managers from most other financial service industries is the lack of capital intensity, which supports a higher relative valuation. The largest retail players are private (Capital Group, Fidelity, Vanguard), demonstrating how growth, in fact, requires relatively little external capital. ■ We expect a continuing asset mix shift into global and alternative products to be a key trend affecting the business over the next several years. Our analysis leads us to believe that these asset classes are still underrepresented in both U.S. institutional and retail portfolios and will continue to provide a tailwind for money flows. (We estimate that global and alternative investments for total portfolios are less than half of the allocation of traditional domestic strategies.) These trends underpin our above-average growth expectations for Franklin Resources, AllianceBernstein, and Fortress Investment Group. ■ Beyond the next year or two, we see liability-driven investing (LDI) and the acceleration of the retirement payout market as two important developments that could potentially change the landscape within the industry. In both instances, we see greater competition emerging from outside the industry, making scale, product breadth, coordination of global research, and asset/liability management skills more critical to long-term success. ■ Other issues that we address in our report include a statistical analysis of how performance translates into net fund flows, how recent tax uncertainty provides an opportunity (for AllianceBernstein and Fortress), and the likely continuing influence that financial sponsors will have on M&amp;A for the industry.Industry Conclusions ■ We are initiating coverage of the U.S. Asset Management Sector with an Overweight position. Although the median company currently trades at 18.3 times our 2008 EPS estimates, a 5-7% premium versus historical averages, we see valuations as reasonable in light of good organic growth and free cash flow prospects, in addition to a mix-shift toward higher fee products. ■ Valuation. We apply a discounted cash flow approach that is supplemented with a PEG analysis. Specifically, we forecast five-year earnings growth at 9.5% for the industry, with longer-term, perpetual growth at 5%, and a discount rate of 11% which translates into 20% upside potential for the group. We believe these assumptions are relatively conservative and consider the fact that the long-term growth rates for the industry will likely contract as baby boomers withdraw funds from retirement and other investment accounts over the next 15-20 years. A more optimistic scenario of 7% long-term growth rate (200 basis points higher) translates to more than 50% upside potential for the group, which supports our favorable view on the sector. (See Exhibits 1, 2, and 3 for full details regarding our forecasts.) ■ Valuation aided by lack of capital intensity. What separates asset managers from most other financial service industries is the lack of capital intensity, which supports their higher relative valuation. We believe capital efficiency is illustrated by the fact that the largest retail players are private companies (Capital Group, Fidelity, Vanguard), which shows how growth needs little external capital. ■ Coverage. We are launching coverage on 13 asset managers, with Outperform ratings on INVESCO, Fortress Investment Group, Franklin Resources, T. Rowe Price, AllianceBernstein, and Affiliated Managers Group, and Neutral ratings on BlackRock, Calamos, Eaton Vance, Federated Investors, Janus, Legg Mason, and Waddell &amp; Reed. Our best value idea is INVESCO; performance consistency at a reasonable price is T. Rowe Price; best absolute growth idea is Fortress Investment Group; and our favorite globally positioned stock ideas are AllianceBernstein and Franklin Resources. ■ We are not launching with any Underperform ratings, as the stocks that seem fairly expensive to us, JNS and EV (currently trading at P/E premiums versus historical averages and peer group averages) will likely produce strong near-term net fund flow results. The company with the greatest near-term performance/merger integration challenges, LM, is fairly cheap, trading just below 14 times our cash flow estimate. ■ Going global. Over the next several years we believe the key trends affecting the business will include a continuing asset mix shift into global and alternative products and market share shifts in both the global and domestic institutional markets in favor of companies with strong liability-driven investing (LDI) competencies, which suggests a premium on companies with strong coordination of global research processes. Aside from the view that global and alternative products have a good chance of outperforming traditional domestic strategies over the mid to longer term, we believe these asset classes are still underrepresented. Accordingly, we believe both U.S. institutional and retail portfolios will continue to provide a tailwind for money flows (we estimate that global and alternative investments for total portfolios are less than half of the allocation of traditional domestic strategies). We therefore forecast above-average growth rates for companies with well-positioned global (and/or alternative) franchises, such as BEN, AB, and FIG (five year earnings growth rates of 10%, 10.5%, and 15%, respectively, versus the group average of about 9.5%). ■ LDI is changing the rules. We believe LDI is changing the rules of the game in the institutional asset management industry from an asset class performance/index approach, to a more sophisticated total return and structured solution (including broad ranges of traditional and nontraditional asset classes) versus the cost of a liability. ■ Non-traditional competitors. Because of the diverse skills needed to be the structured provider of choice (a hybrid of insurance, traditional asset management, alternative asset management, and investment banking), we see competition across industry lines intensifying between asset managers, investment banks, and insurers. We believe BlackRock and AllianceBernstien are bothwell positioned to compete in this arena, but we note that this opportunity did not play a big role in our initial ratings since we expect that the financial benefits are more likely to be realized beyond the one year time horizons that our ratings encompass. ■ Performance matters. While breadth of products, global footprint, and LDI competency are all growing in importance, at the end of the day, good old-fashioned performance and adding alpha should continue to separate the winners from the losers in the battle for assets. Our regression analysis on a sample of large asset managers shows that funds with a five Morningstar rating (we used one-year ratings) have produced organic growth (net flows as percentage of AUM) of 9 percentage points greater than 4-star-rated funds, and 24 percentage points greater than 1- and 2- star-rated funds. By using the same Morningstar data, Janus, AMG, and TROW had the best overall mutual fund performance (at least 60% of AUM has 4 or 5 stars from Morningstar) over the past one and three years, while year-to-date performance suggests that both AIM (owned by IVZ) and Calamos may be on their way to reversing the tide on some performance challenges. We expect these good performance results to translate to above-average near-term organic growth trends for JNS, AMG and TROW (7-10% for 2007 versus 6-7% average for the group). ■ Tax uncertainty provides opportunity. A potential change in tax law for publicly traded partnerships has created recent price weakness for AB and FIG. We assume that FIG will pay a 35% tax rate (versus its current 26% tax rate) by 2009 and have reflected this in our valuation, while for AB, we believe there is less risk of a meaningful increase in its tax rate (since we believe the most recent proposals of focusing on carried interest would not have a material impact on AB). For AB, we apply a 10% discount to our valuation to reflect future taxation uncertainty (and another 10% discount for the minority ownership position of public shareholders versus 60% for AXA Group), and for FIG we apply a 12% discount to reflect the expectation of a 35% tax rate by 2009. Our conclusion is that both stocks are still attractive, even after factoring in conservative discounts for potential changes in taxation. ■ Financial sponsors and M&amp;A. Following the recent announcement that Nuveen Investments has agreed to be acquired by an investor group led by private equity firm Madison Dearborn Partners, LLC, we suspect that more private equity/financial sponsor deals may be around the corner. With strong and stable cash flows, minimal capital needs to support growth, and an opportunity to inject more financial leverage than the typical financial services company, this as an attractive area for private equity, in our opinion. ■ The next frontier—the payout market. As it currently stands, we believe life insurance companies with leading guaranteed minimum withdrawal benefits (GMWB) variable annuity products are best positioned to gain market share in the payout market, a market that should experience substantial growth over the next 20 years. Accordingly, we expect the mutual fund asset managers (i.e., AB, BEN, Capital Group, Fidelity, and BLK) with strong positioning within the variable annuity business should benefit.