The Zacks Investment Management industry continues to bear the brunt of a constant shift toward passive investing. As fees earned by the industry players are lower compared with active investment strategies, this continues to exert pressure on margins. Also, tighter regulations, rising compliance costs and technology upgrades are expected to strain industry players’ profitability.
Yet, the industry will benefit from investors' shift toward higher-yielding investment vehicles. Hence, sustained economic growth and falling rates will aid assets under management (AUM) balance. So, asset managers like Artisan Partners Asset Management APAM and GCM Grosvenor Inc. GCMG are worth betting on.
About the Industry
The Zacks Investment Management industry consists of companies that manage securities and funds for clients to meet specified investment goals. The companies earn by charging service fees or commissions. Investment managers, also called asset managers, manage hedge funds, mutual funds, private equity, venture capital and other financial investments for third parties. By appointing an investment manager for one’s assets, investors get more diversification options than if they manage their assets independently. Investment managers invest their clients’ assets in different asset classes, depending on their needs and risk-taking abilities. Hence, the diversification, which investors get by appointing asset managers to manage their assets, helps reduce the impacts of volatility and ensures steady returns over time.
3 Themes Influencing the Investment Management Industry
Shift Toward Passive Investing to Continue: Investors have been moving away from actively managed funds and toward low-cost passive investment options. With interest rates expected to decrease further in 2025, investors are likely to re-assess their risk levels, leading to a rise in asset inflows into equities and alternative investments, such as index funds, private credit funds and exchange-traded funds (ETFs). These investment options typically offer lower fees to asset managers compared with actively managed investment funds. As the demand for such investment vehicles continues to increase, asset managers will be able to generate higher fees. On the whole, decent economic growth and declining interest rates will keep driving inflows into the industry. However, a steady shift toward a passive strategy will put pressure on industry players’ margins.
Mounting Expenses: Tighter regulations globally to enhance transparency have increased compliance costs for investment managers. Also, as industry players are constantly trying to upgrade technology to keep up with evolving customer needs, technology-related costs are expected to keep rising. Further, using artificial intelligence (AI) and machine learning to enhance operational efficiencies may lead to increased expenses in the short term, but will ultimately support investment managers' operating margins in the long run.
Rising Assets Inflow to Support AUM Growth: Equity markets globally have performed impressively in the past two years, driven by sustained economic growth. This resulted in solid AUM growth. With falling interest rates and the removal of election uncertainty in several regions, investors are likely to rotate out of money market mutual funds or short-term investments into other higher-yielding assets like equity funds, alternative assets and long-term bond funds.
Also, deregulation is expected to open up the cryptocurrency market and previously inaccessible retirement market. Further, the steady growth of tokenized assets – the tokenization of traditional assets, such as real estate and equities – is attracting investor interest. Thus, these factors are expected to drive AUM balance in the upcoming period. So, investment managers will likely witness a solid improvement in performance fees and investment advisory fees, which constitute a major part of their revenues.
Zacks Industry Rank Indicates Grim Prospects
The Zacks Investment Management industry is a 37-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #143, which places it in the bottom 42% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is because of the disappointing earnings outlook for the constituent companies in aggregate. The aggregate earnings estimate revisions show that analysts are losing confidence in this group’s growth potential. Since the 2024-end, the industry’s earnings estimates for 2025 have been revised 2.6% lower.
Before we present a few stocks from the industry despite a gloomy picture, let us check out the industry’s recent stock market performance and valuation picture.
Industry vs. Broader Sector
In the past two years, the Zacks Investment Management industry has underperformed the S&P 500 Index while outperforming its sector. Stocks in the industry have collectively soared 46%, while the S&P 500 composite has rallied 46.6% and the Zacks Finance Sector has appreciated 39.1%.
Two-Year Price Performance
Industry's Current Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing investment management companies because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 6.47X. This compares with the highest level of 7.40X, the lowest level of 2.64X and the median of 4.49X over the past five years. The industry is trading at a significant discount compared with the market at large, as the trailing 12-month P/TB for the S&P 500 composite is 13.36X, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a low P/TB ratio, comparing investment managers with the S&P 500 may not make sense to many investors. However, the comparison of the group’s P/TB ratio with that of its broader sector seems more meaningful.
When we compare the group’s P/TB ratio with the broader Finance sector, it seems the group is trading at a slight premium. The Zacks Finance sector’s trailing 12-month P/TB of 6.02X for the same period is below the Zacks Investment Management industry’s ratio, which the chart below shows.
Price-to-Tangible Book Ratio (TTM)
2 Investment Management Stocks to Invest In
Artisan Partners: Based in Milwaukee, WI, Artisan Partners is focused on providing high-value-added active investment strategies to clients globally. As of Dec. 31, 2024, the company’s AUM balance was $161.2 billion.
Robust AUM balance, along with diverse product offerings and investment strategies, will keep supporting Artisan Partners’ revenue growth. Improving trends in global equity and debt markets and stabilizing economy will likely support AUM, thus aiding top-line growth.
Focusing on long-term growth, APAM invests in new teams and technological and operational capabilities. The company’s debt levels seem manageable, given the decent liquidity position.
APAM shares have gained 3.1% over the past six months. Over the past 30 days, the Zacks Consensus Estimate for its 2025 earnings has been revised 2% upward to $3.60. The company, which has a market cap of $2.8 billion, currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: APAM
GCM Grosvenor: Headquartered in Chicago, IL, GCM Grosvenor is a global alternative asset management solutions provider. As of Dec. 31, 2024, the company, which delivers flexible solutions to institutional and individual investors globally, had AUM worth $80.1 billion.
GCMG's financial strength is bolstered by its strategic expansion, global presence, diversified product offerings and solid AUM balance. The company continues to broaden its international footprint, currently serving clients in 34 countries and deploying capital across more than 100 nations through a wide range of investment strategies.
These initiatives position GCM Grosvenor to capitalize on the sustained growth of the alternative asset management industry. Given the earnings strength and solid balance sheet position, the company is expected to sustain efficient capital distributions.
Over the past six months, shares of GCM Grosvenor have gained 25%. In the past 30 days, the Zacks Consensus Estimate for the company’s 2025 earnings has moved 1.2% upward to 81 cents. The stock, which has a market cap of $2.5 billion, carries a Zacks Rank of 2.
Price and Consensus: GCMG
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