Join our community of smart investors

Dividing lines emerge for ‘torched’ asset managers

Market downturns are never good for asset managers, or their investors, but there is an emerging split between specialists and generalists
July 12, 2022
  • Generalist managers are suffering an existential crisis
  • Niche players and wealth managers are all the rage

It is a measure of how far, and quickly, the market has turned that analysts havehad to scrap their estimates for an entire sector just six months after publishing them. For example, in Panmure Gordon’s own words, its forecasts for asset and wealth managers have been “torched”. 

Even so, there are significant splits in valuation emerging between generalist asset managers and more specialist offerings, a gap that also incorporates the growing divide between wealth managers and platforms. In other words, depending on which company you invest in, valuations are now low in both relative and absolute terms, but investors need to be cannier than ever when it comes to picking the right share. As will become more obvious as we move through results season, most estimates for the sector are likely to be heavily revised downwards in most cases.

 

Twilight of the gods

For the biggest managers, 2022 has been a torrid year so far. Jupiter (JUP) has had the most trying time, with little sign that its ongoing efforts to stem fund outflows, deal with legacy issues or satisfy mutinous shareholders are having much impact.

With the dividend yield now at 12 per cent, the market seems to be betting that a cut in the payout is in the post, even though the company’s policy of not distributing special dividends has left it with plenty of capital to cover that potential level of payout. Jupiter’s new management has its work cut out, but it does have the advantage that it will be given some time to reorganise its offering or otherwise put the company up for sale.

While Jupiter still has a hefty asset base of £55bn, Abrdn’s (ABDN) £500bn of assets under management puts it into a whole different league. But it seems to share many of the same weaknesses with other generalist managers such as Jupiter. To begin with, there is a distinct tendency within this group to operate too many underperforming funds, rather than concentrating assets in areas where there might be a qualitative advantage.

In common with most asset managers, there seems to be an over-reliance at Abrdn on the cult of the star manager – which is as much a marketing tool as an indication of quality. The result is that generalist managers are struggling to remain relevant in a market that is increasingly dominated by smaller specialist managers with better marketing and a focus on niche areas such as ESG or technology.

This latter group of managers have benefited from higher relative inflows and nimbler client acquisition.

It is unclear in which direction Abrdn wishes to go. The acquisition of DIY share platform interactive investor for £1.5bn in December last year is a case in point. While there are clearly some synergies between ii and Abrdn, particularly in terms of client acquisition, in retrospect the deal has a distinctly ‘top-of-the-market’ feel to it. Some analysts are openly questioning whether Abrdn will now have to impair the entirety of ii’s balance sheet value considering difficult market conditions.

The 43 per cent fall in the share price over the past 12 months puts Abdrn at a forward price/earnings ratio of 15, which still does not look particularly cheap in comparison with some of its peers.

 

Rise of the specialists

Specialist asset managers have not fared much better in terms of share price performance when compared with the sector giants. Polar Capital (POLR), for instance, in relative terms, has lost slightly more value than the generalists. However,it and Liontrust Asset Management (LIO) have proved to be considerably more innovative in their marketing and have placed themselves in niches that can attract fund inflows from ESG-conscious investors and those interested in technology growth companies. 

An area of concern might bethat Polar has started diversifyingits technology offering at a time when attracting fund inflows might prove difficult. It may need an extended period of time before its strategy can be accurately judged for its success or failure.

One specialist area where valuations have held up is wealth management, after takeovers in the spring and banks becoming interested in building a presence in the area, fuelling speculation of further deals.

The disappearance of venerable Brewin Dolphin into the arms of Royal Bank of Canada (CA:RY) is an example of a growing global trend. However, the £1.6bn price tag might need some revision the next time RBC updates its estimates for goodwill amortisation. 

Overall, the price support for the rest of the wealth managers has been significant, though. Brooks MacDonald (BRK) has seen its share price lose only 8 per cent over the past year in the expectation of a further round of bids.

Near stablemate Rathbones (RAT) is likely to be hit by softer unit trust sales this year, but the group’s exposure to specialist advice has increased and should give it a diversification edge – again the hope that there are banks potentially looking for a wealth manager, particularly one with an ESG offering, has helped maintain investor interest in the shares.

Overall, it is going to be a bumpy results season for the sector, but there are still structural differences between companies that can have a powerful impact on the underlying share prices.