While coronavirus represents a new challenge for most industries, is a “familiar one” for asset managers, the analysts said, as it is “primarily an issue of falling asset values”, with 15%-plus collapses seen three times in the last decade.
“Each crisis contains its own idiosyncrasies of course, and we believe investors should reflect on the longer-term implications for the industry of dislocation in parts of the debt market.”
While financial markets have been quick to re-price assets to reflect coronavirus-related disruption and the uncertain economic outlook, the impact of coronavirus on the asset management space has been largely been “front-end loaded” compared to other industries, the analysts said.
“We believe it is too soon to buy shares where this is not the case, even if the long-term growth opportunity remains intact,” they added
Hargreaves, for example, was heading for a strong year until the pandemic broke and the Bank of England cut rates to record levels.
Furthermore, due to their reliance on individual savers and retail investors, Hargreaves, St James’s Place and Jupiter Fund Management PLC (LON:JUP) are seen by the analysts as more susceptible than most from the economic fallout.
“Individuals are likely to bear the brunt of higher unemployment, greater job insecurity and lower consumer confidence. Retail investors also have a structurally higher gross redemption rate, which is an unhelpful characteristic in an environment of muted gross sales.”
Analysts at the German bank expect the variable dividend of HL and Jupiter to be “scaled-back significantly”, the St James high payout ratio is “vulnerable to a step-down in earnings”, while the Standard Life Aberdeen PLC (LON:SLA) dividend, which was maintained in March's full-year results, is forecast to be more than halved in 2021.
Ratings and targets adjusted
The analysts suggested investors ‘sell’ stocks of companies that entered the crisis “with issues”, such as Jupiter and Standard Life Aberdeen.
St James’s Place was downgraded to ‘hold’ from ‘buy’ on anticipation of a cut, while HL, Standard Life and Schroders were already on the same rating.
Ashmore was kept at ‘hold’ as it is seen as susceptible to a potential further round of weakness for emerging-market economies.
Man Group Ltd (LON:EMG) was the only UK-listed ‘buy’ as the resilience of its absolute return and total return funds over recent weeks “validates the core customer proposition of these funds”, supporting flows over the next 18 months, while robust cash generation and strong balance sheet are “well-suited to the current environment”.