As first-quarter 2011 earnings season begins, portfolio managers and stock analysts expect good news from the finance sector, but sentiment about the sector’s outlook for the rest of the year favors asset management firms over banks.
While big banks including Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and even JPMorgan Chase (JPM) still face risks of more write-offs, asset managers such as BlackRock (BLK) have a strong business model, said Neuberger Berman managing director Rich Levine in an interview on Wednesday.
Financial-services investment bank Keefe, Bruyette & Woods, meanwhile, favors asset managers Invesco (IVZ), Legg Mason (LM) and Affiliated Managers Group (AMG) as its top picks.
“We’re less interested in the big banks right now partly because our fund is meant to be conservative and defensive, and I’m afraid there’s still bad news. I’m not sure they’re done taking write-offs,” said Levine (left), a co-portfolio manager of the Neuberger Berman Equity Income Fund, which has a five-star Morningstar rating.
“There’s still risk out there for BofA, Citi, Wells and even JPMorgan. Our sense is that things may be getting better for those four, but they’re not finished taking write-offs for bad loans on their books, and they don’t pay much in dividends,” Levine said.
Good Outlook for Asset Managers
In comparison, asset managers have a good outlook due to their business model, Levine said. Money went into bonds rather than stocks in 2008 and 2009, but with the recent stock rally those firms will see assets under management (AUM) grow as the stock market continues to head upward.
“These companies charge less for managing bonds than stocks, so for the two years prior to the last couple of months, whatever growth they had was on the
fixed-income side, where margins are thin,” Levine said. “But in the last couple of months money is going into stocks, so the mix shift is going in their favor.”
Of the asset management firms, the Neuberger Berman Equity Income Fund holds stock in BlackRock. Levine also likes Franklin Resources (BEN), Invesco and Legg Mason.
In a first-quarter preview of asset managers released Thursday, Keefe, Bruyette & Woods modestly raised estimates and price targets for most asset managers as the firm marked-to-market its AUM forecasts to reflect higher equity values.
“We think flows for many managers remained positive as equity flows modestly improved and fixed income inflows remained positive. We believe valuations generally remain reasonable for many asset management stocks and our top picks include IVZ, LM and AMG,” KBW analysts Robert Lee and Larry Hedden wrote in their preview.
KBW lowered its rating on Waddell & Reed (WDR) to Market Perform on valuation. With only 10% total potential return to our new $44 price target, KBW analysts think the risk/reward in the stock has become less compelling despite what they expect will be continued positive new business trends.