Associate Director At Firm Sees Increased M And A Activity In Asset Management Sector For 2010 And Beyond
June 30, 2010 - The Wall Street Transcript has just published Small Cap Investing and Other Investing Strategies Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Michael Kim is an Associate Director in the research department of Sandler O'Neill + Partners, L.P. His research coverage focuses on asset managers. In 2010 Mr. Kim was recognized by the Financial Times/Starmine Analyst Awards for stock picking in the capital markets industry. Mr. Kim has also appeared in print media and on television, including The Wall Street Journal, Barron's and Bloomberg. Prior to joining the firm in 2007, Mr. Kim worked for the Buckingham Research Group and for Putnam Lovell NBF, serving on each firm's asset management research team. He received a B.S. in finance from the University of California, Berkeley.
TWST: Of those "buy"-rated stocks, which is your top pick and why?
Mr. Kim: Our top pick at the moment is Franklin Resources, with a lot of the trends that we've been highlighting really lining up well for Franklin. They've got best-in-class flows, they are broadly diversified, and they've got scale in a number of different categories, whether it's global equities, global fixed income or their non-U.S. distribution footprint. So 25% to 30% of their asset base is coming from investors outside of the U.S. Lead indicators remain quite favorable, with strong investment performance track records, and their AUM mix sets up well for the trends that we see playing out over time. Also they've got just about the highest margins across the group, and I actually think margins could continue to trend higher from these levels as their assets-under-management base continues to grow. And then finally, Franklin's balance sheet remains a key differentiating factor. They've got a significant amount of cash available to them that allows them to buy back stock. They just recently paid a special dividend and if the right type of acquisition opportunity came up, they certainly have the capacity to fund a large-scale deal. So these are options that I think most other asset managers really aren't in a position to fully capitalize on today. So for all those reasons, I think Franklin is one of the best-positioned asset managers out there today.
TWST: Which product categories present the best opportunities right now, and which of your companies are best positioned to take advantage of any traction in those categories?
Mr. Kim: I don't not know if it is necessarily specific product categories, but what I would say is that, like I mentioned before, I think we are going to see the highest growth rates coming from retail investors outside of the U.S. that are transitioning from being savers to being investors. By that I mean that if you look at household balance sheets across a number of countries outside of the U.S., many individuals still have a significant percentage of their wealth in traditional bank deposit accounts. I think over time, we are going to see that money transition away from savings accounts into more capital market solutions, like mutual funds, which aren't really all that widely owned in many countries overseas, whereas the U.S. market is much more mature. You've got about half of U.S. households owning at least a handful of mutual funds, maybe it's through their 401(k) plan or their retirement portfolio. But I just think growth overseas will outpace what we see here in the U.S. So that's one area that I would highlight. The other, and I did mention this a bit earlier, is the institutional market, where we're likely going to see a tremendous amount of money in motion as pension plans rebalance their portfolios and take a second look at the managers that they are currently working with. That could suggest that they are going to become more proactive in terms of replacing some of the managers that have underperformed more recently. So again, I think there is going to be a lot of money in motion and a lot of opportunity to capture market share in the institutional space.
TWST: Do you expect M And A activity in this space to continue for some time? Are there any particular deals you would tell investors to keep an eye on?
Mr. Kim: I don't know that there would be any specific deals that I would be able to pinpoint, but I do think consolidation is going to be an ongoing trend across the industry. We've seen a number of high-profile deals getting done in the last year or so, whether it's Invesco-Morgan Stanley (MS), BlackRock (BLK)-BGI, Ameriprise (AMP)-Columbia. I don't necessarily think we are going to see those types of transactions going forward because those were more about motivated sellers that for other reasons were looking to dispose of their asset management divisions. But I do think we are going to see more deals getting done. I think scale is becoming increasingly important. The bigger players are continuing to gain market share. And keep in mind, there are fewer distributors out there now that we've seen a lot of the wirehouses consolidate. So as a result, I think the distributors are looking to do business with a fewer number of firms, bigger firms that can offer broader product capabilities. Focusing on costs, I think you are going to see distribution and compliance/regulatory costs on the rise. So at the end of the day, the economics of the business are coming under some incremental pressure, and that might lead to smaller firms ultimately getting squeezed out of the business and being forced to look to partner with a bigger franchise. So that's the type of deals that we are likely going to see as I look across the industry.
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