Often times a good investment idea is simple and does not require a lengthy, in-depth write-up. Since most of us work in the investment management industry, we understand how good the economics of the business is with large scale. With that being said, I think Invesco (IVZ), one of the largest asset managers in the world with ~$800 billion under management, is very attractive at current prices.
Industry Out-of-Favor: With a lot of market volatility over the past few months (impacting AUM flows) and an increasing amount of capital moving away from active management to passive, several asset managers are trading at below-market multiples. The reason for the increasing movement to passive is because the majority of active managers have under-performed passive for several years combined with the fact that passive strategies are lower in fees. It is my view that as more capital flows into passive, the inefficiencies in the market will increase over time and at some point provides a good set up for active to outperform passive, which will hopefully result in stronger asset flows for the best active managers.
Why Invesco: Not only is IVZ trading at a considerable valuation discount to the market, but it is one of the highest quality asset managers in the industry for the following reasons:
79%, 75% and 66% of its active AUM were in the top half of its peer group on a 5-year, 3-year and 1-year basis, respectively has helped result in net inflows over the past year
PMs incentivized to focus mainly on performance:
70% of PM’s compensation tied to his/her 3, 4 and 5-year record while 30% of comp is tied to size and growth of AUM
Up to 50% of comp is deferred of which up to 75% goes into his/her fund
Other 50% of comp is cash-based
~18% of its AUM is in passive strategies, which provides a partial hedge against a continued movement of capital from active to passive
No “star manager” risk for any material portion of its AUM
Non-U.S. corporate domicile—IVZ has never been a U.S. domiciled company. It has been domiciled in Bermuda since 2007 and before that was in the UK. It has a territorial tax based structure, which means it pays the corporate tax rate on profits earned in that geography, but has the freedom to deploy that cash flow as it sees fit to use for dividends, share repurchases, acquisitions and/or debt pay-down. There is no cash “trapped” in foreign jurisdictions.
This tax structure provides it a good platform to make acquisitions of non-U.S. asset managers.
Good management with real skin in the game: CEO Martin Flanagan took over in August 2005, helping turn around the Invesco brand and platform. He got costs under control, improved performance and made key acquisitions, which have broadened its product offerings and improved its scale. Flanagan joined IVZ from BEN where he was co-CEO and prior to that co-president, COO and CFO. Flanagan owns 3.7M shares worth ~$124M.
Good Capital Allocation: Since the current management team took over in mid-2005, IVZ has had a steadily increasing dividend with a current 42% pay-out ratio. IVZ has returned ~80% of free cash flow to shareholders via share repurchases and dividends over the past 5.5 years.
Return on Acquisitions: By far its largest acquisition was Van Kampen in June, 2010 where it paid $1.46B (including after-tax restructuring costs) for $114.6B in AUM. Based on the synergies it got by merging various funds together net of some attrition, IVZ realized an attractive after-tax return of ~10%. Nearly half of the AUM acquired is focused in U.S. value, municipal bonds, UITs, and closed end funds where IVZ had little to no scale. At the same time there was little distribution overlap. As a result, IVZ gained 88 new distributors in 2011 compared to 40 in 2010. Including revenue synergies, the ROI was likely north of 10%.
Invesco has a presence in the institutional and retail segments of the investment management industry in North America, Europe, and the Asia-Pacific, serving clients in ~150 countries. IVZ invests in core, growth, and value stocks of small-cap, mid-cap, and large-cap companies. IVZ employs a fundamental and quantitative analysis with a bottom-up stock picking approach to make its investments. The firm conducts in-house research to make its investments.
Retail (67% AUM) – provides retail investment solutions to clients globally. It offers ETF products through PowerShares. Also, IVZ sponsors unit investment trust (UIT) products with the acquisition of Morgan Stanley’s retail asset management arm, including Van Kampen Investments. Its retail products are primarily distributed through third-party financial intermediaries, including broker-dealers, fund supermarkets, retirement platforms, financial advisors, banks, insurance companies, and trust companies.
Institutional (33% AUM) –manages assets on behalf of public entities, corporations, unions, non-profit organizations, endowments, foundations, pension funds, and financial institutions. IVZ has a major presence in the U.S., U.K., Europe and Asia-Pacific.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.
Active management comes back into favor, which allows the best asset managers to increase their share of fund inflows.