Investment Bank: BlackRock Won’t Outperform in 2020

Keefe Bruyette and Woods cited the asset manager’s “premium valuation” as the reason for its downgrade, while giving a boost to Invesco.

Stefan Wermuth/Bloomberg

Stefan Wermuth/Bloomberg

Asset management giant BlackRock has weathered the headwinds facing the asset management industry better than most — but that may change in 2020.

That’s according to Keefe, Bruyette & Woods, an investment bank that specializes in financial services, which said in its 2020 outlook for traditional asset managers that it is downgrading BlackRock from outperform to market perform.

KBW thinks the asset manager is still better positioned than its peers to sustain organic growth and earnings per share growth, and it boasts a broad product range, strong distribution resources, and a large technology footprint. Still, all of those factors contribute to what KBW calls a “premium valuation” for the stock.

KBW also downgraded Affiliated Managers Group, which buys stakes in asset managers, from outperform to market perform, saying that while it thinks AMG’s stock is “too cheap,” it thinks that the lower rating is more appropriate for now, given its “greater visibility into potential flow improvement at other, equally inexpensive managers.”

At the same time, KBW upgraded Invesco to outperform from market perform, saying it has “a pathway to improvement in flow trends over the course of 2020 and into 2021” thanks to continued investment into its ETF products; improvement in gross sales volumes, especially after closing its acquisition of OppenheimerFunds earlier this year; and momentum in China.

The bank also noted that Invesco “has been making investments in financial advisor technology processing platforms Jemstep and Intelliflow, respectively, with the aim of driving delivery of its model portfolios through these platforms,” according to Robert Lee, a KBW equity analyst, in the report. Invesco acquired Jemstep in 2016 and Intelliflow in 2018.

These platforms have translated to big business for BlackRock, which rolled out Aladdin for Wealth only a few years ago. Already 13 large global wealth managers are using the platform, which offers institutional risk management and portfolio construction tools to wealth managers.

But 2020 may be the year when the giant asset manager gets more serious competition on the distribution front, from Invesco and other asset managers. KBW said the Alladin for Wealth platform — which is part of BlackRock’s larger and lucrative operating system for investment managers — has been an important source of new business for the firm.

Franklin Resources and Legg Mason — which KBW called out as a “top pick” for 2020 in the report — are also taking stakes in start-ups that provide investment solutions to financial advisors or directly to investors, according to Lee.

Reaching financial advisors is critical, particularly as the industry races to find ways to remain competitive at a time when margins are under pressure.

[II Deep Dive: Asset Management’s Gatekeepers Grow More Powerful]

Strategy consultant McKinsey’s 2019 report on the North American asset management industry depicted an industry in which gatekeepers like advisors and outsourced chief investment officers have taken on more influence. This bigger role for gatekeepers has enabled them to wrest concessions from asset managers on everything from transparency to fees — a theme KBW echoed in its report.

“Traditional asset managers realize (or should realize) that they have been steadily disintermediated by their distribution partners and/or consultants,” wrote Lee. “We think efforts to make deeper connections with advisors and investors through technology can continue to gain speed, but we believe more managers want to find ways to get closer to their actual customers.”

Lee argued that firms like AllianceBernstein, Franklin, and Eaton Vance — those with significant businesses catering to wealthy individuals — may consider small acquisitions to strengthen their relationships with advisors. The brokerage firm stressed that the assets acquired through these advisors can be longer term and less reliant on short-term performance issues.

KBW’s top picks in 2020 are AllianceBernstein and Legg Mason. According to the research report, Alliance Bernstein has a good mix of products and positive organic growth. Legg Mason will benefit from cost savings and likely growth in both fixed income and alternatives.