Morningstar | Outflows on the Wane Again at Waddell & Reed During 1Q; No Change to $18 per Share FVE
There was little in narrow-moat Waddell & Reed's first-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 March quarter with $71.7 billion in assets under management, up 8.9% sequentially but down 10.7% year over year. Net outflows of $1.8 billion put the firm back on the path to improving organic growth after it lost $3.8 billion to outflows in the fourth quarter of 2018. But the firm still has a long path ahead before it can consistently generate positive flows. While overall investment performance has improved, with 59%, 46%, and 54% of the firm's assets outperforming peers on a one-, three-, and five-year basis, respectively, at the end of March, the company faces meaningful headwinds in generating consistently positive organic growth in the near to medium term, with retail-advised gatekeepers raising the hurdles for the kind of underperforming funds with higher fees that make up a good portion of Waddell & Reed's portfolio.With average AUM down 14.9% year over year, first-quarter revenue declined 12.8% compared with the year-ago period. Given our expectations for ongoing fee compression for the industry and slightly higher underwriting and distribution fees for Waddell & Reed in particular, revenue will likely decline at a 3% CAGR during 2019-23, with organic growth averaging negative 6%-8% annually during the same period. Adjusted operating margins of 13.7% represented a 640-basis-point decline compared with the first quarter of 2018--a sign of the negative operating leverage in the asset-manager business model. However, this was in line with our long-term forecast, which calls for not only fee but margin compression as active managers like Waddell & Reed work to narrow the fee gap with low-cost passive products and spend more heavily to enhance investment performance and distribution.
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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