The current bear market is a double whammy for asset managers. Their assets under management (AUM) are down because of the decline in the value of the investments that they hold, and because customers will pull money out of the market, leading to outflows that further exacerbate the decline in AUM.
But this same leverage to share prices that hurts these stocks in a bear market means that they can rebound strongly when the market turns the corner. Two industry-leading, world-class asset managers, T. Rowe Price Group (TROW 0.96%) and BlackRock (BLK), seem like good bets on a recovery, and the sell-off looks like an opportunity to buy shares on the cheap.
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1. T. Rowe Price
Shares of T. Rowe Price, a $26 billion Baltimore-based asset manager, are down a painful 47% from their 52-week high largely for the aforementioned reasons. At this point, the shares look attractively valued at less than 10 times earnings and with a dividend yield of over 3.9%.
T. Rowe Price is a Dividend Aristocrat that has increased its dividend payout annually for 36 years in a row. The company is returning capital to shareholders in other ways as well, including paying out a special dividend of $3 a share in 2021 and by buying back shares.
It is an active manager, and the majority of its assets under management are in retirement accounts, meaning customers are less likely to withdraw them during times of market turbulence.
Furthermore, within retirement, T. Rowe is a leader in target date funds, which have grown in popularity over the past decade.
While some question the long-term viability of active managers like T. Rowe as passive and index funds grow in prominence, it is important to note that T. Rowe's various strategies and vehicles have paid off for investors over the long term. Morningstar gives half of its funds four- or five-star ratings (with five the best) and finds that 60% of them have outperformed the market over the past three, five, and 10 years.
Even if index investing continues to grow, there should be plenty of appetite for successful active managers, and T. Rowe Price should shine in this environment even if some of the weaker asset managers fall by the wayside.
With a strong and durable business model, attractive valuation, no debt, and a substantial dividend payout, I view T. Rowe as a top stock to add to your portfolio at a discount.
2. BlackRock
Shares of BlackRock, the world's largest asset manager, are down 35% from their 52-week high. After the sell-off, it now trades at a very reasonable 17 times earnings and has a solid dividend yield of over 3%.
While BlackRock's AUM, at $8.5 trillion, is down 11% as compared to the same time period last year, in the second quarter the company saw net inflows of $90 billion. That is impressive at a time when markets have been turbulent, and it's a testament to the strength of BlackRock's business and reputation.
While T. Rowe Price has made its name as an active asset manager, BlackRock is the leader in passive and index investing, two trends that have only grown stronger over time. Nearly two-thirds of BlackRock's AUM is held in passively managed products. The company is also popular with institutional clients, which is to its advantage as these investors have more money to invest and tend to be more stable and less fickle than many retail investors.
BlackRock is also attractive for its international exposure. About one-third of the company's AUM is from outside of the U.S. and Canada, and it is focused on expanding in the Asia-Pacific region, which could prove to be lucrative over time.
With market leadership in the growing field of passive investing, the size and scale advantages that come with having the world's highest AUM, and potential for international growth, BlackRock appears to be a buy after the sell-off. The solid dividend and the fact that it is repurchasing shares (with $500 million in buybacks in the last quarter) add to its appeal.
The investor takeaway
T. Rowe Price and BlackRock have very different approaches to asset management, but both should continue to be successful over time. Both have seen AUM fall in 2022's bear market, which has tanked their stock prices. Both enjoy significant size and scale and now look attractively valued with generous dividend yields. Both also seem like good ways to invest in a market rebound.
Of the two, I give a slight edge to T. Rowe Price based on its less expensive valuation and higher dividend payout, but both look like sound long-term investments.
