Stockwatch: are asset managers signalling a classic rally?

Vaccines are a major catalyst, but risks are rising of a reversal.

In my last piece, I examined how Tesla (NASDAQ:TSLA) exemplifies speculative excess. This time, I highlight two asset managers that affirm the rally accelerating, especially in the fourth quarter of last year.

Vaccines were a prime catalyst, although if history counts for anything on a 10-year view, the risks are rising also - of a reversal ahead. 

Exceptional gain in assets under management  

In the UK, the £800 million Liontrust Asset Management (LSE:LIO) has seen a 43% rise in its funds base to £29.4 billion over three months, or an 83% rise since the start of the current financial year from 1 April 2020.

I have not witnessed anything like such acceleration by an asset gatherer in nearly 40 years of following stocks. It reflects both public eagerness to join the party and rising asset values. 

There were £792 million net inflows over the final quarter of 2020, or £2,540 million over nine months – representing 3% and 9% respectively, of total assets under management or advice.

The bulk of valuation advance therefore derives from markets than ‘fear of missing out’.  Last July’s acquisition of the Architas UK investment also contributed £5.6 billion. 

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In the US, the $111 billion (£82 billion) investment giant BlackRock (NYSE:BLK) attracted $126.9 billion in the fourth quarter. While this was slightly down on the same period in 2019, it took its assets under management to $8.68 trillion.

It is also using its scale to undercut rivals in indexed funds and expand in private equity. But it acknowledges investors are positioned bullishly ahead of November’s presidential election, in the hope of further stimulus measures and a return to global growth.    

Reflecting how zilch interest rates are distorting markets, BlackRock has had to waive fees on money market funds targeting short-term debt, so as to avoid clients incurring negative returns.  

Complicating the fundamentals picture however, rivals are expected to report net outflows given their smaller scale and lesser brand recognition.  

Euphoric BlackRock versus a more cautious Liontrust 

The US asset manager has shown a 65% rally to a current all-time high of around $728, after a 17% drop last February to March. It has broadly maintained an upwards trend-line since the Covid-19 sell-off. 

By comparison, Liontrust plunged 30% in response, rebounded to an all-time high of more than £13 by June, then consolidated sideways in a range of £11.75 to £14.40 range, currently £13.  

Liontrust did, however, soar from about 600p at the start of 2019 and from sub-100p in 2012, so in long-term perspective has a quite similar parabolic chart as BlackRock’s. This reflects inflation in asset values linked to central banks’ stimulus years. 

Liontrust’s uplift is more pronounced, given its relatively smaller base enhancing the growth rate in assets under management, and profits after fixed costs are covered. 

The stock initially rose 9% from £12.56 to £13.65p after last Wednesday’s update but has settled back at around £13, which I feel – as when also discussing JD Sports Fashion (LSE:JD.) a week ago – shows British investors are more measured than Americans. 

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Consensus for a big uplift in Liontrust profit/earnings 

Versus net profit of £13 million in the year to March 2020, a 169% jump to £35 million is projected this year, on revenue up 16% to £144 million.  

Such extent of year-on-year uplift is not all about operational gearing but the comparison on the March 2020 year (see table below) when costs jumped and depressed profit. 

The annual report showed a 44% hike in admin costs to £69.7 million, with note four revealing director/employee costs up 32% to £14 million. Share incentivisation expense was up 48% to £3.7 million, while members’ drawings as an expense were up 14% to £32 million.  

This illustrates my regular point about partnership-style businesses. They are all very well as listed companies, so long as governance balances employee returns with outside shareholders. Here, ‘members drawings’ seem akin to a private partnership. Hence, I have tempered my enthusiasm on Liontrust, having originally been keen back in October 2012 at 112p – when it was similarly enjoying strong capital inflows. 

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It was possible to regard professional services’ costs of £8.4 million as exceptional, and there was a 36% rise in “other” admin costs to £20.9 million.

But the costs’ hike spoiled the March 2020 profit numbers after a respectable 26% advance in gross profit to £106.6 million. Overwhelmingly bullish conditions for equity values and attracting funds meant the stock shrugged off higher costs.  

An 90% rise in normalised earnings per share (EPS) to 71.5p is projected for this current financial year to 31 March. That implies a forward price-to-earnings (PE) ratio of 18.2x with the stock, currently £13, easing to 13.4x based on 36% growth in EPS to 97.1p in the March 2022 year. Such forecasts appear to have upgraded slightly since the trading update. 

It is quite a short time frame, but if the coming year projection is at all fair then the PEG ratio (dividing the PE by earnings growth rate) would be very attractive: sub-0.4. 

Should a cyclically adjusted PE apply? 

The dilemma is that such momentum potentially reflects the ‘top of the cycle’ if capital inflows and funds’ appreciation falter. Unless stock markets are enduringly rigged and back-stopped by central banks then a more modest PE multiple is deserved. 

You could say that people taking more responsibility for their finances is a long-term driver; the question being whether this justifies a ‘hold’ stance through potential volatility. 

In chart terms, in the last year or so the stock has had its best performance, from about 750p in October 2019. 

Liontrust Asset Management - financial summary
Year end 31 Mar

Source: historic company REFS and company accounts

Fancily branded fund themes 

It appears Liontrust’s marketing department has struck winners by way of ‘sustainable investment’ representing 32% of funds. This is a theme replicated across other asset managers, including BlackRock, and is meant to mean resistance to a market downturn. Time will tell if a decade-long extended bull market does snap. 

This is followed by ‘economic advantage’, with 28%, based on companies’ competitive advantage qualities; ‘multi-asset’ at 24% and ‘global equity’ at 9%, offering diversification. These are joined by ‘cash flow solution’ at 4% and ‘global fixed income’ at 2%. 

Such a marketing mix helps drive asset gathering if clients believe it helps them achieve better risk/reward than, say, a selection of domestic UK equities. A lesson of the 2008 crisis – if not February/March 2020 – was all assets being affected if bears roar. 

Despite an overall success story, Liontrust’s European income and macro thematic investment teams have been closed. You would think it possible for most styles to thrive while assets rise generally. 

Ultimately a medium-term call on equities 

Take profits on this and other asset manager-type stocks if you believe inflation will rise later in 2021 as economies pick up. Also, and alternatively, if market euphoria is due a reality check – economies remain quite weak when government stimulus measures wind down. 

Or if you are confident in a V-shaped recovery - even a repeat of the Roaring Twenties as animal spirits are released post-pandemic - hold this and similar stocks tightly.   

Fundamentals are tricky to interpret. Basic commodity prices are rising, which tend to trade inversely to equities over long cycles – given higher input costs compromise company profits. As yet, however, US inflation numbers released last Wednesday showed only a slight increase in December consumer prices amid weak demand for goods and services.  

The employment market – a key contributor to inflation – similarly involves contrasts. For now, it seems likely to remain weak, but skills shortages could emerge and push up wages if economies rebound. 

The contrarian inside me shouts ‘sell’ and it will be interesting to see if I have succumbed to the crowd to maintain: ‘Hold’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.