The kind of financial-market volatility we’ve seen recently can wreak havoc on asset managers, but some still thrive.
AllianceBernstein (AB) -) and BlackRock (BLK) -) are now “the best positioned” among traditional asset managers, Bank of America analyst Craig Siegenthaler wrote in a commentary.
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AllianceBernstein
Alliance suffered a $4 billion net outflow of assets in the second quarter, driven by “lumpy redemptions,” he said. But he expects that drop reversed to an inflow of about $2 billion in the third quarter.
AB generated net inflow of $1 billion to $2 billion in August from July, driven mostly by inflows into fixed income and alternative investments, Siegenthaler said.
He has a one-year target price of $44 for AB. It traded Wednesday at $30.50. That's upside potential of 44%.
BlackRock
As for BlackRock, Siegenthaler forecasts $60 billion to $70 billion of net inflow for the third quarter, up from $57 billion a year earlier.
“The improved flows this quarter are largely attributable to improving equity and fixed income iShares flows and positive money-market fund flows,” Siegenthaler said. iShares are BlackRock’s exchange-traded funds. Money-market funds have benefited from rising short-term interest rates.
He expects BlackRock’s long-term flows to grow in the fourth quarter, to expand 4% to 5% in 2023 as a whole and 6% in 2024. That compares with 4% in 2022.
“This view is supported by BLK’s industry-leading bond ETF business, as we look for passive [investments] to win 60% to 70% of the fixed income rebalancing wave in 2024 after" the Federal Reserve stops raising interest rates.
Siegenthaler has a one-year price target of $858 for BlackRock. It traded Wednesday at $634. That's upside potential of 35%.
While both companies are generating organic growth well below their potential for 2024, they are well positioned for reallocations into fixed income after the last Fed rate hike, which he sees coming in November.
Morningstar Assessment of Asset Managers
AllianceBernstein
Morningstar moat (durable competitive advantage): none. Morningstar fair value estimate: $35.
“With $694 billion in managed assets as of Aug. 31, AllianceBernstein has the size and scale to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions,” wrote Morningstar analyst Greggory Warren.
He cited AB’s investment diversification as a strength. “However, this has not always translated into solid organic growth or above-average profitability,” he said.
BlackRock
Morningstar moat: wide. Morningstar fair value estimate: $810.
“Unlike most of its peers, BlackRock, which is at its core a passive investment shop, has been able to offset many of the secular headwinds facing traditional asset managers with a few tailwinds of its own,” Warren said.
“Through its iShares exchange-traded fund platform and institutional index fund offerings, the firm sources … more than half of its revenue from passive products.”
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