Shares in asset managers were among the most reliable financials during 2013, giving decent growth alongside well-covered dividends. Guinness manager Will Riley picks two asset managers set for more share price appreciation.
Last year was a good one for asset managers, with rising equity markets bringing cheer for both the businesses and their stocks. The MSCI World Index returned 21.2% to the end of December 2013, prompting significant investment inflows.
Aberdeen’s acquisition of SWIP triggered an instant 14.7% jump in its share price and earned the sector mainstream media attention.
Over the long term, we expect asset managers to grow their earnings and free cashflow faster than the broad market. While last year was a good year for the sector, we remain optimistic about its prospects.
One company that illustrates why asset managers make attractive investments is Waddell & Reed. Although it is less well known in the UK, Waddell & Reed is a large, diversified, US-listed asset manager with a market cap of $5.5bn and $114bn in assets under management (AUM).
Despite its size, the company is growing fast, with revenue forecast to grow 16% in 2013 and 15% in 2014. Growth forecasts should be taken with a pinch of salt, but strong recent fund performance gives us confidence these will be achieved.
As well as growing revenues, W&R has also earned decent profits, with operating margins at 26% in 2012, and 28% forecast for 2013. Its cost control contributed to these healthy margins: in a period of rising revenues, headcount – usually an asset manager’s greatest cost – has been relatively stable.
As is typical of listed asset managers, W&R is highly cash generative and has paid steadily rising dividends. Dividends are well covered and the balance sheet is strong.
While the stock valuation relative to history looks high, we do not think it is stretched. The company is targeting decent rates of organic growth and margin improvement, and should benefit from exposure to equity markets.
Liontrust Asset Management is another good investment, although it is much smaller with a $171m market cap and $5.5bn in AUM. The company has been in recovery in recent years after key manager departures in 2009 and rapid decline in AUM. It has now reinstated its dividend, albeit at a much lower level. We expect strong dividend growth from here.
Revenues are forecast to increase: up 41% next year and 20% in 2015. Again, this should translate into an improved bottom line, with forecast earnings per share up 89% in 2014 and 39% in 2015.
The ability of asset managers to increase earnings significantly as revenues improve demonstrates their scalability and operational gearing – it does not take much more company expenditure to manage $1bn than it does to manage $100m, so when a fund takes off, profits can soar.
Despite the problems Liontrust has faced, the balance sheet is healthy. This strength bodes well for future returns of capital to shareholders in the form of dividends.
Will Riley is co-manager of the Guinness Money Managers fund
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