Beaten-Down Asset Managers Set to Rebound
Every now and then, the market presents wonderful buying opportunities. These moments are hard to identify and even harder to capitalize on. That’s because discounts in the market require sell-offs that are driven by fear, which is a hard emotion to overcome.
However, for those who can tune out the fearful noise and focus on the fundamentals of beaten down, high-quality companies, great returns can be at hand. Today, I think the market is presenting another one of these irrational sell-offs, this time in the asset management space.
In recent years, we’ve seen other major sell-offs result in fantastic returns for those who bought into weakness. Remember a couple of years ago when Amazon (NSDQ: AMZN) was going to crush all of brick-and-mortar retail? A verb was coined: getting “Amazoned.”
Analysts and investors alike were trying their best to figure out which retail names had moats that could withstand the e-commerce giant’s onslaught. While they were scrambling about, they hit the sell button on seemingly everything with a physical retail presence. Look at the share price graphs of these popular retail names over the past year. In hindsight, that weakness was way overdone.
About this same time, many of the oil-centric energy names sold off as well. The price of oil had fallen from over $100 per barrel in 2014 to nearly $30/barrel in 2016. Supply was outpacing demand and there were fears that this wouldn’t change anytime soon. Was the energy revolution at hand? Were fossil fuels going to become the fuels of the past? Maybe one day they will, but that day remains far off.
Since the 2016 election, the price of oil has been on the rise. The “lower for longer” scenario might not be totally accurate. Sure, crude oil hasn’t reached heights anywhere near its prior peaks, but it is well off its lows. The share price of many of the big oil names has recovered. There were fears of unsustainable dividends across the energy sector, yet none of the majors have cut their payouts.
Once again, this overreaction turned out to be a good buy signal. The fear created discounted share prices, allowing investors to lock in abnormally high yields on cost and achieve solid returns into the future. Let’s look at asset managers.
Enticing Value Plays
We’re seeing what appears to be a race to the bottom in terms of management fees. This hurts asset managers’ profitability, although it’s worth noting that these companies generate revenue on more than low-cost exchange-traded funds (ETFs).
Furthermore, while the market is all about passive investments right now in what many believe to be a secular bull market, I’m not convinced that the pendulum won’t eventually swing back the other way, towards more active management. Any change in this trend, as well as higher interest rates, will likely result in improved operating results for these companies.
Right now, many of the popular asset managers are down double digits from their 52-week highs. BlackRock (NYSE: BLK) is down 20.2% from its highs. T. Rowe Price Group (NSDQ: TROW) is down 14.25%, Lazard (NYSE: LAZ) is down 20.5%, Franklin Resources (NYSE: BEN) is down 25.1%, Invesco (NYSE: IVZ) is down 38.7%, and Wisdom Tree Investments (NSDQ: WETF) is down a whopping 41%.
As you can see below, T. Rowe is the only name that has outperformed the S&P 500 during the trailing 12 months. This is largely because of the company’s reliance on more actively managed funds.
More often than not, I’ve found that the market operates with a shoot first, ask questions later mindset. This is because of the short-sightedness of the large-scale fund managers and algorithmic traders. I can’t blame those who are beholden to quarterly results for operating with more fear. They have less time to make up for mistakes. However, for long-term investors, this fear is misplaced.
Wonderful companies tend to adapt to changing market conditions. From time to time there are secular issues that can’t be overcome, but that level of disruption tends to be an outlier. As a value investor, I’ve found that buying into weakness like the one that we’re currently witnessing in the asset management space can lead to great results.
It’s rarely possible to time the bottom of a trough perfectly, but it is relatively easy to determine whether or not a stock is trading cheaply. It seems clear to me that these asset management names are trading at a discount. The mantra on Wall Street is “buy low and sell high.” Well, in the asset management space, it’s time to go bargain hunting.
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