Asset management stocks, once the bellwethers of Wall Street, fell out of favor spectacularly in 2018, with the Dow Jones U.S. Asset Managers Index (^DJUSAG) slumping 27% for the year, underperforming the S&P 500 by roughly 20%. The industry had margins squeezed from lower fees, a continuing shift toward passive products, capital expenditure on technology and increased compliance costs. To add further pain, a plethora of managers failed to beat the market, which resulted in many investors requesting redemptions.
"At the end of the day, what investors see is an industry facing significant organic-growth headwinds." With the shift to passive funds, there is "unrelenting fee pressure" and aggregate net fund flows that are "zero to slightly negative," said Robert Lee, an analyst at Keefe Bruyette & Woods, per CNBC.
Despite the headwinds buffeting the industry, multinational auditor PricewaterhouseCoopers projects that global assets under management (AUM) will reach $112.2 trillion by 2020 and $145.4 trillion by 2025 – up from $84.9 trillion in 2016 – due to the burgeoning wealth of high-net-worth individuals and the mass affluent. Moreover, large players should benefit from expected consolidation within the industry that allows them to expand their product offerings to increase growth and profitability.
Traders should watch these three asset management names for industry leadership. From a technical perspective, all three stocks look poised to break out from bottoming chart patterns. Let's take a closer look at each.
State Street Corporation (STT)
State Street Corporation (STT) provides institutional investors with financial products and services including investment servicing, investment management, investment research and securities trading. The Boston-based financial services firm operates in more than 100 countries and has $2.5 trillion in AUM. State Street plans to lay off 15% of its senior management to reduce costs and make its organizational structure leaner, per a Bloomberg article. Trading at $72.47 with a market capitalization of $27.44 billion and offering a 2.60% dividend yield, the stock is up nearly 15% year to date (YTD) as of Feb. 26, 2019.
The bears remained in full control of State Street's share price throughout most of 2018, with the stock falling over 40% between February and December. Over the past four months, an inverse head and shoulders pattern has formed, indicating that a bottom may be in place. If the price breaks above the pattern's neckline at $75, look for a move up to $80, where the stock may consolidate as it approaches a long-term downtrend line and the 200-day simple moving average (SMA).
T. Rowe Price Group, Inc. (TROW)
With a market cap of $22.96 billion, T. Rowe Price Group, Inc. (TROW) offers asset management services to institutional and individual investors in the United States and globally. The company, which controls $962 billion in AUM, recently lifted its quarterly dividend from 70 cents to 76 cents, a jump of 8.6%. As of Feb. 26, 2019, the stock trades at $98.11 – toward the low end of its 52-week range between $84.59 and $127.43. Although the stock is up 6.27% YTD, it is underperforming the asset management industry average by 8% over the same period.
Like State Street, an inverse head and shoulders pattern has formed on T. Rowe's chart between October and February. A close above the bottoming pattern's neckline on above-average volume at the $100 level could trigger an impulse wave move to the next significant resistance area at $105, where the price finds resistance from the 200-day SMA and a horizontal line stretching back across last year's price action. A push through $106 could see the bulls run the stock to the June 2018 swing high.
Jefferies Financial Group Inc. (JEF)
Headquartered in New York and founded in 1968, Jefferies Financial Group Inc. (JEF) engages in asset management, investment banking, capital markets and commercial mortgage banking. The company recently announced that it plans to acquire the balance of HomeFed Corporation (HOFD), a property developer and owner of real estate primarily in California and New York, in which it already has a 70.1% stake. Jefferies stock, with a $6.13 billion market cap, has a YTD return of 17.60% YTD as of Feb. 26, 2019, making it the top performer on the three stocks discussed. Investors receive a 2.47% dividend yield.
Jefferies share price plunged 20% in the December stock market rout but has pared most of that loss in the first two months of 2019. The relative strength index (RSI) shows a neutral reading of 50.0, indicating that the price has plenty of room to make an upside push before consolidating. Traders should watch for a breakout above a seven-month downtrend line and the 200-day SMA. A breach of this level could see the stock advance to $24.60, where it's likely to encounter resistance from the upper trendline of a six-month trading range that formed between February and July last year.