Affiliated Managers Stock: Bet On Return Of Active Investing

Elevator Pitch

My Buy investment rating for Affiliated Managers Group, Inc.’s (NYSE:AMG) stock stays unchanged.

I analyzed AMG’s above-expectations Q2 2022 financial results and determined that it still deserves a Buy rating as part of my previous August 5, 2022 article for the stock. Affiliated Managers Group’s shares have outperformed the broader market on a relative basis since my earlier update. Between August 5, 2022 and October 17, 2022, AMG’s stock price pulled back by -8.7%, which is better than the relatively more significant -11.3% correction for the S&P 500 in the same time period.

I continue to rate AMG as a Buy. I think that Affiliated Managers Group will benefit from investor funds being allocated from passive investments to active investments, and AMG’s valuations are inexpensive.

AMG’s Valuations Are At Attractive Levels

At the beginning of this article, I highlighted that Affiliated Managers Group’s stock price performance was superior to that of the S&P 500 in the past two and a half months. Nevertheless, AMG’s shares are still down in absolute terms. Specifically, the company’s share price has dropped by -27.0% since the start of this year.

As it stands now, Affiliated Managers Group’s valuations are very appealing.

The market currently values AMG at 6.6 times consensus forward next twelve months’ normalized P/E according to valuation data sourced from S&P Capital IQ. In the last 15 years, AMG has only traded below a forward P/E multiple of 6 times for long stretches of time during two periods, namely the 2008-2009 Global Financial Crisis and the peak of the COVID-19 pandemic in the first half of 2020. As another comparison, Affiliated Managers Group’s 15-year mean forward P/E multiple is much higher at 11.8 times.

One gets to a similar conclusion using another valuation metric apart from P/E.

Affiliated Managers Group is now trading at a consensus forward next twelve months’ Enterprise Value-to-Revenue multiple of 3.8 times as per S&P Capital IQ data. This is lower than AMG’s average forward Enterprise Value-to-Revenue metric of 4.2 times. Also, AMG’s forward Enterprise Value-to-Revenue ratio has only dropped below 3 times twice in the past one and a half decade. Specifically, AMG’s forward revenue multiples fell to historical trough levels for the 1H 2020 and 2008-2009 periods, respectively.

In other words, if we don’t see another crisis of the same magnitude as either COVID-19 or the Global Financial Crisis, there shouldn’t be substantial downside for Affiliated Managers Group at current price and valuation levels.

As such, it is encouraging that AMG recognizes that its shares are undervalued. The company has committed to spending no less than $0.4 billion (close to 9% of its current market capitalization) on share repurchases this year as per its Q2 earnings call management comments. Affiliated Managers Group has already allocated $265 million of its excess capital to share buybacks in the first half of this year, so the company should spend at least another $135 million on share buybacks in 2H 2022.

AMG Is A Play On The Resurgence Of Active Investing

Affiliated Managers Group’s share price and valuations have been adversely affected by the increasing popularity of passive investing and ETFs (Exchange Traded Funds) in recent years. But there are signs that change is coming.

A recent October 6, 2022 Bloomberg article titled “Active Investing Outperforms in September Amid Brutal Stock Rout” cited research from Bank of America (BAC) with “59% of large-cap active funds” and “73% (of value funds)” doing better than “their Russell 1000 benchmarks” and “the Russell 1000 Value Index”, respectively last month.

In particular, the fact that more fund managers with a value tilt beat the relevant indices in September is worth noting, as this should have a positive impact on Affiliated Managers Group’s future fund inflows. Some of AMG’s affiliates with a value investing approach include the likes of Yacktman Asset Management, Tweedy, Browne Company, and Third Avenue Management, among others.

Separately, Natixis Investment Managers’ 2022 Global Survey of Institutional Investors suggests that the death of active investing is exaggerated and sends a clear message that institutional investors appreciate the importance of active investing. The results of Natixis Investment Managers’ survey highlight that 70% of respondents surveyed “will invest in active funds to achieve better risk-adjusted returns”. Also, the consensus among survey respondents is that institutional investors will allocate on average 70% of their funds to active investments (versus 30% for passive investments) in the forward three year period.

The Natixis Investment Managers’ survey results are consistent with Affiliated Managers Group’s management comments. At the company’s most recent second quarter investor briefing in August 2022, AMG’s CEO Jay Horgen stressed that investors will “change course” and pivot from a passive investing approach of “simply betting that markets and risk assets will continue to rise” to “an active (investing) approach.”

I take the view that there will be a meaningful reallocation of funds from passive investments to active investments in the current market environment. I view AMG as a key beneficiary, especially because it has a number of reputable value managers among its affiliates.

Concluding Thoughts

A Buy rating for AMG is justified on the basis that active investing is likely to see a resurgence, and the stock’s current valuations are at a discount to historical averages.