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Morningstar | Moats for the U.S.-Based Asset Managers Are Narrowing; Stick With BlackRock and T. Rowe Price

For much of the past decade, the traditional U.S.-based asset managers have benefited from a bull market in equities, which has helped to lift AUM levels for most firms. Concerns about that bull market run ending sooner rather than later, and ongoing pressures from poor active-equity investment performance and the growth and acceptance of low-cost index-based products (which have not only impacted organic growth but have also raised questions about fee and margin compression longer term), have left the shares of most asset managers trading at historic lows. With investors focused on organic growth and profitability when assessing the group, we've actually seen a bifurcation in the group during the past year between the perceived haves (those capable of generating organic growth and maintaining margins) and the have-nots (those expected to struggle to do both or that have fallen into a pattern of poorer performance and positioning). While some of the 12 U.S.-based asset managers we cover are currently trading at multiples not seen since the 2008−09 financial crisis, we continue to recommend that long-term investors focus on quality over price by sticking with the only remaining wide-moat firms in our coverage--BlackRock and T. Rowe Price--even if they are trading at premiums, as we remain wary of firms that are trading at meaningful discounts to the group (especially those with no-moat ratings) expecting the headwinds that the industry will face over the next five to 10 years to keep their valuations depressed, with few meaningful catalysts capable of getting them up off the mat.

During the back half of last year, we took a much harder look at the moat sources, economic moats, and moat trends of the U.S.-based asset managers, digging deeper into the organizational structures and intangibles attached to their businesses in order to better differentiate among the wide, narrow, and no-moat firms in the group. We tightened up our assessment of each firm's competitive strengths and weaknesses, focusing on the following nine characteristics: AUM Scale Efficiency; Product Breadth & Geographic Reach; Passive & Active Capabilities; Distribution Channel Strength; Switching Cost Strength; Fund Fee Levels & Relative Disparity; Fund Fee Diversity & Exposure to Fee Compression; Fund Performance & Manager Reputation; and, Fund Stewardship & Firm Culture. We believe a focus on these nine characteristics allows us to better determine which firms are more likely to be successful in the future, given that they provide us with insight into the traits that both our equity and manager research groups believe will be necessary for asset managers to succeed in the future. For more details on our findings, as well as the changes we made to the moats and moat trends of the U.S.-based asset managers, please see our Observer, "New Era for U.S. Asset Managers: Shifting Balance of Power with Distributors and End Clients has Narrowed Moats of Most Firms," published on March 15.