Asset managers have strongly outperformed broad equity markets during the past few decades: since 1990, our universe of asset managers has delivered a positive annual return of 17.2%, versus 6.5% by the MSCI World Index.
While asset managers tend to fall more in bear markets, their relatively fast recovery and strong performance in bull markets has more than compensated for this volatility – and presented investors with a significant opportunity in the aftermath of any market correction.
Consistent growth
Driving the outperformance of asset management stocks over the past 20 years have been strong secular factors that will continue for years to come.
We view asset management as one of those special industries, such as luxury goods, that can grow faster than global GDP for multiple decades, and there are a number of reasons for this view – the first is growing household wealth.
Household net financial wealth has grown and will continue to grow at a rate (2% per annum) that is significantly above global GDP growth.
Second, after a gradual reduction of financial savings from banks deposits, these savings are being redeployed into equities and bonds, and to an extent in hedge funds and other alternatives. Interest rates on bank deposits have declined, increasing the proportion of household financial assets to be ‘managed’ by asset managers.
Third, our analysis shows that the median cashflow return on investment (CFROI) from 1991 to 2013 for firms in our asset managers’ universe is more than double that of the broad market.
We calculate the median CFROI for asset managers – more than $0.5bn (£0.3bn) market capitalisation – over this period at 16.7% pa versus 7.6% pa for the broad market, defined as all companies in the CSFB HOLT database.
As a result, there are good reasons in our view to expect continued growth, but there are also a number of characteristics found in asset management firms of which investors should take note.
Asset managers can enjoy high returns on capital and high growth rates. Asset managers’ potential for unusually high return on capital is a key attraction for investors.
Not much capital is required at startup, and successful asset managers can enjoy high rates of return on capital and a growth rate higher than underlying investment returns as extra assets are raised. Even average companies in the sector tend to achieve a high return on capital.
