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Wells Fargo analysts rework asset manager stock ratings as passive funds ramp up

Wells Fargo Securities LLC analysts believe the growth of passive products globally will continue to be one of the bigger risks for the traditional asset management industry, according to a Jan. 2 research note.

The market for foreign exchange-traded funds lags the U.S. by about six years, the analysts wrote, citing Morningstar data, indicating that the global trend toward ETFs will continue into the near future.

The analysts upgraded two asset managers that have shown consistent net inflows: BlackRock Inc. and T. Rowe Price Group Inc. The analysts noted that both BlackRock and T. Rowe Price Group have "meaningfully outperformed on organic growth," adding that they now have greater conviction in the companies' ability to do this consistently.

With BlackRock's significant scale and its iShares ETF platform, which contributes about 38% of fees, the analysts believe it will likely continue to take market share. They added that BlackRock's average organic growth matched its longer-term average of 4.2%, surpassing the median of negative 1.4% for other asset managers they cover and the average organic growth of 2% for the industry's total U.S.-domiciled retail assets.

For T. Rowe Price Group, the analysts said management's medium-term target of 1% to 3% organic AUM growth is "highly credible" considering the company's opportunities in U.S. and international markets.

The analysts upgraded BlackRock and T. Rowe Price Group to "overweight" from "equal weight," and raised the price targets to $575 from $460 and to $145 from $114, respectively. Their EPS estimates for BlackRock are $27.70 for 2019 and $31.25 for 2020. For T. Rowe Price Group, they anticipate EPS of $8.50 for 2019 and $8.80 for 2020.

Additionally, the analysts downgraded Franklin Resources Inc., Invesco Ltd. and Janus Henderson Group PLC to "underweight" from "equal weight" and BrightSphere Investment Group Inc. to "equal weight" from "overweight."

On Franklin Resources, which operates as Franklin Templeton, the analysts said net outflows have persisted for the last six fiscal years. While net outflows "aren't really getting any worse," the analysts see few catalysts that may drive outperformance for the stock.

The analysts wrote that Invesco has generated net inflows in only three of the past 39 quarters, incurring nearly $160 billion of net outflows during the same period. They expect active equity outflows to persist, which would likely challenge the company's ability to achieve positive organic revenue growth.

On Janus Henderson Group, the analysts noted that roughly 45% of AUM as of the third quarter of 2019 was domiciled outside the Americas. While international AUM is typically viewed favorably, the analysts expressed concern over the potential disruption by passive investment providers in these regions.

The analysts said BrightSphere Investment Group has seen both its organic growth and price-to-earnings ratio deteriorate since its 2014 IPO, while outflows reached $6.2 billion in the third quarter of 2019. While the analysts said outflows have likely bottomed, they see "no obvious clear path" to return to net inflow status on a recurring basis.

The price target for Franklin Resources was reduced to $25 from $29; Invesco's was reduced to $17 from $18; Janus Henderson Group's was unchanged at $24; and BrightSphere Investment Group's was reduced to $11 from $12.

For 2019, the analysts' EPS estimates are $2.59, $2.46 and $1.73 for Invesco, Janus Henderson Group and BrightSphere Investment Group, respectively. Franklin Resources' EPS for 2019 stood at $2.35.

For 2020, the analysts' EPS estimates are $2.70, $2.55, $2.55 and $1.85 for Franklin Resources, Invesco, Janus Henderson Group and BrightSphere Investment Group, respectively.