EUR 850.00 For Business Accounts Only

Morningstar | Weaker Equity Performance and Outflows Continue to Impact Federated's Growth and Profitability

A confluence of several issues--poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel--has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. While we still believe there will always be room for active management, we believe the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.With $459.9 billion in managed assets at the end of 2018, with its AUM being somewhat diversified across its equity (16% of managed assets) fixed-income (14%), alternative (4%), multi-asset (1%) and money market (66%) operations, Federated Investors has the size and scale necessary to be competitive in the asset-management industry. That said, this has not always translated into solid organic growth or above-average profitability, with the firm's adjusted operating margins of 29.5% on average during 2014-18 being just below the group average of 30%. And while during the past five (10) calendar years Federated's organic growth rate for its long-term AUM averaged 1.2% (3.2%) with a standard deviation of 6.4% (5.8%), the company's equity platform went into outflow mode during 2017-18 (losing more than a fifth of AUM to net redemptions), and its fixed-income platform had been in net outflow mode in three of the past five calendar years (with a large 20.4% organic growth rate in 2017, driven by a large institutional mandate, offsetting the weakness in other years). Given that we expect the industry to continue to face stiff headwinds as we move forward, we envision Federated's organic growth averaging negative 2.7% annually during fiscal 2019-23, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.