Bullish on Asset Managers - GMP Securities

Includes: CIFAF, IGIFF
by: FP Trading Desk

While the market’s strength is propelling assets under management (AUM) at Canadian money managers above expectations, investors are also responding to positive fundamentals for the group. Recent cost-cutting and streamlining efforts by Canadian asset managers appear to have positioned them well for healthy performances in the next few quarters.

GMP Securities analyst Stephen Boland is growing more bullish on several names in the sector as a result. In a normal market, the analyst might consider lowering his recommendations as stock prices approach his targets. However, due to increased investor optimism and a possible correction, Mr. Boland believes downgrading beta stocks in an increasingly positive market would be unjustified at this point.

He said in a note to clients:

Though we try to avoid calling the market, we believe that the potential for a sustained recovery justifies raising our target multiples at this time. In our opinion, the most logical way to deal with the current environment is to raise our valuation multiples to account for the bullish environment.

However, Mr. Boland also pointed out that many asset managers are currently trading at or above historic EV/EBITDA valuation multiples, which he thinks could prove problematic in the event of a market correction.

“For those investors that feel the market is overheated, we believe now may be an opportune time to begin moving to the sidelines,“ the analyst said.

At the same time, if a market pause is approaching, he thinks this presents a second opportunity for those who missed the bottom.

Mr. Boland places an extra emphasis on sales as net sales can help insulate an asset manager’s AUM from market swings. With the third quarter winding down with larger-than-anticipated AUM growth, he notes that when the TSX has a positive month, AUMs typically follow suit but to a smaller degree.

The S&P/TSX composite index is up about 5% so far in September. If this performance holds up, the TSX could see gains of more than 11% since the end of June.

Mr. Boland noted that AGF Management Ltd.’s third quarter concluded in August and its AUM rose 7% in the period. As a result, he has plugged in forecasts of 6.5% for both CI Financial Corp. (OTCPK:CIFAF) and IGM Financial Inc. (OTCPK:IGIFF).

He boosted his price target on shares of AGF from C$14 per share to C$17, CI from C$21.50 to C$23.50, and IGM from C$41.50 to C$46. AGF and CI are rated Buy, while IGM is rated Hold.