Morningstar | Outflows and Market Losses Mar Waddell & Reed's 4Q Results; No Change to $18 per Share FVE
There was little in no-moat rated Waddell & Reed's fourth-quarter results that would alter our long-term view of the firm. We are leaving our $18 per share fair value estimate in place. The company closed out the December quarter with $65.8 billion in assets under management, down 17.3% sequentially and 18.8% on a year-over-year basis. Net outflows of $3.8 billion reversed the trend of improving organic growth at Waddell & Reed, with the firm remaining a long way off from generating positive organic growth (with the company's organic growth rate of negative 12.8% last year being its best annual result during 2016-18). Given our expectations for more volatile equity and credit markets in the near to medium term, we expect Waddell & Reed to struggle to generate positive organic growth, with our five-year forecast continuing to call for average annual organic growth of negative 7%-9%.Despite average AUM being down 12.0% year over year and the company's realization rate declining from 0.671% to 0.640%, higher underwriting and distribution fees year over year allowed the firm to produce only a 7.6% decline in fourth-quarter revenue. Full-year top-line growth of positive 0.3% was in line with our forecast for flat revenue growth during 2018. Given our expectations for ongoing fee compression for the industry and slightly higher underwriting and distribution fees for Waddell & Redd in particular, revenue will likely decline at a low-single-digit rate annually on average during 2018-22. As for profitability, full-year adjusted operating margins of 19.2% represented a 10-basis-point improvement over 2017 but were still short of our forecast of 19.7%, with higher underwriting and distribution expenses accounting for most of the difference. With our five-year forecast calling for not only fee compression, but increased spending to enhance investment performance and distribution, we think 2018 might have been a high point for profitability.
Waddell & Reed Financial is a holding company. Through its subsidiaries, the company provides investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Ivy Funds,Ivy Variable Insurance Portfolios, InvestEd Portfolios, Ivy High Income Opportunities Fund, and institutional accounts. The company also provides wealth management services, primarily to retail clients through Waddell & Reed, Inc. (W&R), and independent financial advisors associated with W&R, who provide financial planning and advice to their clients.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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