Despite all-time highs in global bond prices and the rebound in global asset prices since the 2008-09 global financial crisis, stock prices of U.S. asset managers have underperformed the major stock market indices. Over the last ten years, Morningstar’s index of U.S. asset managers is only up 3.0% annually, while the S&P 500 returned 6.7% annually. Traditional asset managers with a tilt towards actively managed strategies have generally fared worse. E.g. over the last ten years, AllianceBernstein (AB), Legg Mason (LM), and Franklin Resources (BEN) returned -5.6%, -8.4%, and +1.2%, respectively on an annualized basis.
The underperformance of traditional active asset managers is due to three trends: 1) the structural shift of assets from actively managed funds to lower-cost and passively managed strategies for publicly traded equities and fixed income, 2) regulatory pressures to lower management fees, especially as active equity managers struggle to outperform their benchmarks, and 3) the unprecedented decline in bond yields has forced fixed income managers to lower management fees and hasten fund outflows to passively managed strategies.
Over the long run, I expect the asset management industry to consolidate further, while the alternative investments space—i.e. private equity, real estate, distressed credit, infrastructure, etc.—will continue to attract a disproportionate amount of fund flows. Investors who want to take advantage of these trends in the U.S./global asset management industry could still find significant value and growth opportunities in various publicly traded asset managers. Within this group, I find Affiliated Managers Group (AMG) to be especially compelling.
AMG has a market value of $7.6 billion and is down by 22% over the last 12 months. I find AMG to be a compelling long-term value play for three reasons.
AMG is the leading consolidator of the best boutique firms in the asset management industry
Founded in 1993, AMG has grown to over $700 billion in assets under management by following a unique strategy of purchasing (mostly) majority stakes in high-performing, boutique, asset management firms specializing in long-only strategies (U.S., global, and emerging market), hedge funds, and specialized private equity firms. Today, AMG holds equity stakes in around 30 asset management firms with over 500 unique products, including AQR, Tweedy Browne, BlueMountain, Pantheon, Barings Private Equity Asia, and Genesis.
Seen as the “buyer of choice” among boutique managers, AMG recently acquired stakes in five asset management firms (covering fixed income, global equities, and several hedge fund strategies) that were held by Goldman Sachs Asset Management. AMG’s 23 years of experience in this area allows the firm to integrate newly acquired firms in a seamless manner from a strategic, financial, and operational standpoint. E.g. its acquisition funding costs (its weighted cost of debt is 3.43%) are relatively low because the firm has an excellent acquisition record; in addition, AMG’s global distribution platform (encompassing Europe, Asia, Middle East, and Australia/New Zealand) allows newly acquired firms to “plug and play” and market their products to a $30 trillion market outside North America. AMG underperformed in the last 12 months mostly because of outflows from its U.S. equity funds; however, as global wealth continues to rise, AMG’s business model is positioned to take advantage of further industry consolidation and keep growing its assets under management.
AMG’s strong alternative asset and global equity mix to benefit from ongoing growth in alternative investments and emerging markets’ capitalization
About 40% of all of AMG affiliates’ client assets are allocated in hedge funds and private equity funds, which generally command higher fees and are more “sticky.” Similarly, about 32% of the firm’s client are assets are held in global equity, foreign equity, and emerging market equity funds—categories where active managers are still attracting inflows and retaining pricing power. Moreover, about 50% of these assets are domiciled outside of the U.S., where again, investors still have a preference for active managers. AMG’s global distribution platform is key to outperformance, as its net fund inflows over the last few years have mainly come from its non-U.S. clients. Because of this, AMG’s affiliates experienced positive net flows in 23 out of the last 25 quarters, which puts them as the best active fund manager in terms of net flows among its peers.
Going forward, AMG’s alternative asset/global exposure will allow the firm to retain its gross margins and to further build out its “global asset manager consolidator model” (AMG’s potential acquisition pipeline includes about 150 prospects). Within the alternative investments space, the competitive landscape is still young and fragmented, with significant room for market leaders to consolidate market share (e.g. within the private equity class, the top five firms manage just 10% of the industry’s assets, vs. over 50% in the traditional asset manager space).
AMG’s valuations are near post-2008-09 crisis lows.
For the trailing 12 months ending June 30, 2016, AMG’s Economic EPS (EEPS) is $12.54 a share, putting the company’s P/E at around 11. During prior bull markets where AMG had experienced outflows, its P/E had bottomed at around 12.5. Given ongoing strong net flows and gross margins, consensus expects year-end 2016 and year-end 2017 EEPS of $12.80 and $15.00 a share, respectively. Even assuming a historically depressed P/E of 12.5, AMG should still trade up to around $188 a share by the end of 2017 based on this measure, for a gain of nearly 35% over the next 14 months.
Disclosure: Neither my firm, CB Capital Partners, nor I hold any shares in AMG.
Henry To, CFA, CAIA, FRM is Partner & Chief Investment Officer at CB Capital Partners. Established in 2001, CB Capital Partners is a global financial advisory and investment firm headquartered in Newport Beach, California, with offices in Dallas Texas, and Shanghai, China and an affiliate office in Mumbai, India. Visit http://www.cbcapital.com and http://www.cbcapitalresearch.com for more information.
