Market slide threatens fresh woe for fund managers
The 22% fall in world equity markets since the start of 2009 - capped by fresh losses yesterday - threatens to further damage the business prospects of asset management firms, according to a new report from financials analysts at Keefe Bruyette & Woods, who have slashed their 2009 earnings forecasts for the sector by a quarter.
Robert Lee and Larry Hedden, who cover listed US fund managers such as BlackRock, AllianceBernstein and Legg Mason, wrote: "In the current difficult environment, price-to-earnings ratios have been, and are likely to remain, suppressed relative to historic norms given the pressure on asset levels, new business flows, and operating profitability."
Analysts at Goldman Sachs, in their most recent report, were similarly bearish. Marc Irizarry, Alexander Blostein and Neha Killa wrote that there was a "glimmer of a hope in January, and then came February."
They cut forecasts and price targets for the listed US managers by 8% on average, writing: "we remain concerned about equity retail flows and see the most immediate opportunity in emphasizing asset managers that benefit from credit flow."
KBW's team were in agreement, sceptical on retail investors' appetite for new equity funds, but that bond funds might do better. However, they pointed out that asset managers' profitability would still suffer. They wrote: "Generally, but not always, fixed-income products have lower management fees".
Institutional investors, though equally alarmed at the deterioration of their portfolios, may respond better. Lee and Hedden said they expected many of them to "aggressively revisit" their allocations and manager selection, and begin overhauls of their investments during the "middle to latter part of 2009".
Among those to suffer the steepest price cuts at the hands of the KBW team were AllianceBernstein, from a target price of $25 a share to $16 - its current share price is $11.24 - and BlackRock, from $129 a share to $105. Its current share price is $92.32.
Lee and Hedden's top pick among US listed managers is Franklin Resources, which sells funds under the brand Franklin Templeton. They said it is best-placed to weather the downturn thanks to a strong distribution platform and a "fortress"-like balance sheet, as well as having a good fixed income capability.
Goldman Sachs' team picked BlackRock and Eaton Vance, saying their peer-group-beating performance in fixed income would benefit them as investors' appetite shifts to credit.
They wrote: "Although Eaton Vance’s core bond product is still relatively small; under $1bn, we believe the firm’s impressive returns in 2008 should gain traction with consultants as institutional mandates begin to shift. Although BlackRock’s 2008 returns slipped, we believe the firm’s relative outperformance versus other large competitors should lead to share gains."
Lee and Hedden ended on a more positive note, pointing out that if equity markets do recover, some asset managers will find themselves in a good position.
The analysts wrote: "Although we expect retail equity flows for many managers could remain weak for an extended period of time, we see flows coming back to many institutional equity managers earlier and many asset managers have a still significant exposure to equity assets that would benefit from any improvement in equity asset values."
--write to mcobley@efinancialnews.com
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