We were disappointed in the results that our portfolio companies State Street (STT) and BlackRock (BLK) registered during the quarter, especially in relation to The Bank of New York Mellon (BK) and Northern Trust (NTRS).

However, we are seeing that BK and NTRS’s results were good only because the rest of the industry has done so poorly during this volatile market.  We analyzed the results of the asset managers who have reported since State Street and BlackRock reported.  We analyzed the results of Janus (JNS), Invesco (IVZ), Cohen & Steers and Ameriprise (AMP).  While we’re no more pleased with the results of State Street and BlackRock than we was before, both companies did better on an organic growth basis than those three.  BlackRock had a small positive organic growth rate of ~0.1% and State Street had an organic decline of -0.3%.  IVZ had an organic decline of 1.3% as did Columbia.  Janus had 2.3%.  Cohen & Steers focuses on real estate investment products and saw a 2.67% organic decline due to a $1.5B withdrawal in institutional sub-advisory related assets.  Lazard had organic growth of 0.8% and its total AUM declined by 8%.  SEI Investments doesn’t itemize fund flows but we could see that its AUM declined by 3.7% on a linked quarter basis.  We can see that State Street and BlackRock saw either a lower percentage of organic assets decline or a lower linked-quarter AUM decline than nearly all of its competitors, so we can see that the issues are mainly industry related as opposed to company specific.


Source: Asset Manager Q2 results

We were surprised to see the positive reception that Wall Street gave to Invesco and Ameriprise.  Maybe it’s because those CEOs aren’t making references to acquisitions.  We actually sympathize with State Street’s desire to acquire assets as there are many desirable asset management and administration franchises available at low prices relative to their pre-crisis highs.  However, the following companies should not be engaging in additional acquisitions:

  • Companies that has yet to exceed its pre-crisis peak in reported EPS
  • Companies that have increased its share count by 50% since 2006
  • Companies that only recently restored the shareholders’ dividends per share to its pre-crisis peak
  • Companies that have seen its PE ratio compress from 20X EPS to 10X EPS
  • Companies that still need to repurchase over $1B in stock as part of an authorized and permitted program

In conclusion, we still believe that there is value to be unlocked in State Street and BlackRock.  Even with the recent pull back in the AUM levels of the companies, BlackRock and State Street are simply too cheap at 13X and 11X trailing twelve month EPS.  BlackRock and State are the industry leaders in asset management due to each company’s strong presence in institutional index products and exchange traded funds.  Because these companies have seen their PE ratios compress from 20-30 to 10-13, we believe that any sign of macroeconomic stabilization will enable the shares trade at a higher multiple.  We also believe that AUM stabilization and growth; whether market driven or through organic growth will provide support for these shares.

DISCLAIMER

Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. This report is confidential and may not be distributed without the express written consent of the original author and does not constitute a recommendation, an offer to sell or a solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential private offering memorandum.

Investments may currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed in this letter for any reason. The author hereby disclaims any duty to provide any updates or changes to the information contained here including, without limitation, the manner or type of any of the investments.

All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and all of the subject securities or issuers. The research analyst is not registered with FINRA, and may not be subject to FINRA rule 2711 restrictions on: communicating with the subject company, public appearances, and trading securities held in the research analysts’ account. No part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. The analyst responsible for the production of this report certifies that the views expressed herein reflect his or her accurate personal and technical judgment at the moment of publication.

Under no circumstances must this document be considered an offer to buy, sell, subscribe for or trade securities or other instruments.

Disclosure: The author has a long position in STT and BLK.  

Copyright 2012 Saibus Research. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Saibus Research.

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