This week, we take a break in our musings on asset manager valuations and impractical sports cars to share some recent media on trends in the RIA space we’ve been following.
A weekly update on issues important to the Investment Management industry
This week, we take a break in our musings on asset manager valuations and impractical sports cars to share some recent media on trends in the RIA space we’ve been following.
The stock market rallied in the first five months of the year, with the Dow Jones and S&P 500 reaching record highs and continuing to climb. Nevertheless, IPOs remain scarce compared to prior years.
The First Quarter 2017 Asset Management newsletter has been released. This quarter’s newsletter focuses on the mutual fund sector, which has been plagued by asset outflows into ETFs and other passive strategies for most of the last decade. The first two months of this year do, however, offer a ray of hope as 45% of U.S. based active managers beat their relevant benchmark, resulting in February being the first month of inflows into active products since April 2015.
Immediately before ordering the Soup Du Jour and duping Sea Bass into picking up his lunch tab, Jim Carrey’s character in Dumb and Dumber, Lloyd Christmas, rudely accosts his waitress at the Truk-Stop Diner with this inexplicable reference to the early 1980s sitcom starring Polly Holliday as Florence Jean “Flo” Castleberry. Decades after the movie’s release in 1994, the market seems to be postulating the same question in pricing RIAs.
Smaller public RIAs started and ended 2016 as a pack, but for about eight months performance was anything but similar. In what I can best describe as a wild ride to a close finish, at one point in July of 2016 Cohen & Steers (CNS) was up nearly 40% while Virtus Investment Partners (VRTS) was down over 30%. Seventy point divergences don’t happen very often, especially considering that, by Christmas of last year, the same spread narrowed to less than eight points.
Despite a rocky year for asset manager valuations, sector M&A was still strong. Total transactions were down about 10% from 2015 while aggregate deal value increased close to 20%. Several themes from the prior year also persisted as wealth management acquisitions remained robust and banks continued to play a pivotal role on both the buy-side and the sell-side.
A quick glance at year-end pricing of publicly traded asset managers reveals a continued skid in cap factors for mutual fund providers offset by some multiple expansion for traditional and alternative asset managers.
Happy New Year 2017! Here are this past year’s 5 most popular posts from the RIA Valuation Insights Blog.
As the second part to last week’s blogpost, the following section from Jay Wilson’s forthcoming book on FinTech describes ways to think about the valuation of robo-advisors, including some real world examples of technology based investment management platforms that transacted.
Despite the potential for FinTech innovation within wealth management, significant uncertainty still exists regarding whether these innovations will displace traditional wealth management business models. In this two part blogpost, excerpted from our new book on FinTech forthcoming from Wiley in early 2017, we look at the potential of Robo-Advisors and offer some thoughts on valuation.
Maybe the recent trend has nothing on Rocky Balboa or Gordon Bombay, but the past few months have been promising for most publicly traded RIAs. Relatively stable market conditions and better than expected earnings are the likely culprits for the group’s “comeback,” which has the overall index up 13% since February.
We have written at length about bearish signs in the RIA space, and valuation metrics seem to generally reflect a reduced growth outlook. We wonder, though, if things are really that bad. While, we suspect there is, over all, some phantom fee compression in the industry as assets are allocated to passive instruments and active managers who charge more don’t get the RFP they once would have, the other two themes focus on demographics and market outlook which are not, necessarily, bearish for the investment management space.
Piggybacking off our post from a couple of weeks back, the downward trend in asset manager pricing has persisted for another quarter, no matter how you slice it. Publicly traded trust banks, alt managers, mutual funds, and traditional RIAs are all down over the last year, with hedge funds and PE firms leading the plunge.
Some of our recent musings on mutual fund outflows and multiple contraction may actually have positive implications for RIA deal-making in 2016 and beyond. The maturation of the mutual fund industry and active fund managers will likely spur consolidation and buying opportunities for those looking to add scale. With valuations and market caps down over the last eighteen months or so, the affordability index has gotten a lot better for many of these businesses.
From a valuation perspective, it appears that alternative asset managers fared the best in Q1. However, closer inspection reveals a bleak quarter for the publicly traded hedge funds and private equity firms in our alternative asset manager index.
Much like Porsche discovered fifty years ago, many banks are responding to regulatory changes by opting for a hybrid model that pairs trust and wealth management operations with traditional banking. The advantages of banks developing their investment management operations are pretty easy to see: it produces a more stable and diverse revenue stream, it provides more touch points for customer relationships, and it can substantially improve a bank’s return on equity.
Of course, opportunity is a two way street, and banks looking to venture into investment management, especially by acquisition, typically encounter a couple of major obstacles: balance sheet dilution and culture clash. Both of these challenges arise from the main difference between traditional banking and asset management. Whereas banking is asset heavy and personnel light, asset management requires not much of a balance sheet, but plenty of expensive staffing. It’s a significant difference that can only be managed head on.
Last week, Brooks Hamner and I spoke at Bank Director’s Acquire or Be Acquired Conference in Scottsdale about how banks can build value through their trust and wealth management businesses. Our session got a great response, probably because we were some of the only speakers offering the banking community some hope. How then do you ensure that a trust not become an earnings-dilutive cauldron of liability?
In this post, we have included the slide-deck from our presentation, “Valuing a Trust & Wealth Management Franchise” from Bank Director’s 2016 Acquire or Be Acquired conference. Even with the present market instability, banks have an interesting opportunity to expand their financial services while diversifying their revenue streams with asset management. We sense some growing demand for sophisticated trust services, and a lot of RIAs in the wealth management space see banks with existing trust departments as a complementary environment to sell into.
Despite the recent uptick, we believe the backlog of available deals remains fairly robust given the four year pause in transactions from 2009 to 2013 and the aging demographics of many investment management firms. The real threat to deal making would be a longer, more pronounced downturn or continued volatility in the equity markets that would crater AUM levels and investor confidence.
A quick look at year-end pricing of publicly traded asset managers reveals a continued skid in multiples for traditional RIAs and mutual funds with modest advancement for the alternative managers and trust banks.
Despite 195 nations signing onto the Paris Climate Conference commitment to clean energy last week, it looks like Santa will be stuffing most asset managers’ stockings with coal this Christmas. Hopefully it’s at least low-sulfur.
December has been a rough slog for the RIA space. So far it’s mostly been attributed to the cracks in high yield credit. With junk bonds stumbling shortly after Thanksgiving, managers with large high yield offerings are feeling the Grinch. One standout example: WDR. Waddell & Reed’s Ivy High Income Fund has suffered huge outflows this year. Pile outflows with asset devaluation and WDR’s stock has gotten crushed, losing almost a quarter of the company’s equity market cap so far this month (!).
Q3 was an especially bad quarter for asset managers, with the group losing over $40 billion in market capitalization during a six week skid. Given the sector’s run since the last financial crisis, many suggest this was overdue and only pulls RIA valuation levels closer to their historic norms. The multiple contraction reflects lower AUM balances and the anticipation of reduced fees on a more modest asset base.
Investment management firms too often mature as a cult of personality, as more than a handful of shops have built success around the talents, habits, and preferences of a strong-willed founder. But what builds success in an RIA doesn’t necessarily perpetuate it, and oftentimes the focus on the individual is at the expense of the institution.
Mercer Capital’s asset management valuation practice is run from our main office in Memphis, Tennessee, and this time of year here means one thing: Death Week. Every year since his death on August 16, 1977, the city of Memphis spends a week memorializing Elvis Presley, the King of Rock and Roll. From all the press lately, you would expect that a similar wake was being held for active management, and with it, much of the RIA community. Elvis is dead, and so too must be active management. We live in the age of auto-tune and robo-advisors, a time when big vocal chords and beating the market have become anachronisms – or are they?
