What are we looking for?
The stock markets are becoming very product-focused and we have seen some traditional asset managers being acquired (CI Financial and Guardian Capital Group within the last year.) With the rise in ETFs, bitcoin and other non-traditional assets, are asset managers still a good place to generate returns? In this number cruncher we will look at valuations for 10 Canadian asset management companies.
The screen
We used StockCalc’s screener to select the 10 largest asset management companies on the TSX. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if they are under- or overvalued compared with their price.
Overview of the techniques used: discounted cash flow (DCF) is a valuation technique where cash flow projections are discounted back to the present to calculate value-per-share. A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies. An adjusted book Value (ABV) is calculated by multiplying book-value-per-share by its historical price-to-book ratio. If we have analyst coverage we may consider the consensus target price.
More about StockCalc
StockCalc is a fundamental-valuation platform with tools to calculate and report on value per share for the 8,000 public companies listed on the NYSE, Nasdaq, ASE, TSX and TSX-V. StockCalc also contains lists of under- and overvalued stocks as well as numerous tools to understand what the stocks you are investing in are worth. (Globe readers can subscribe to Stockcalc using the promo code Globe30, which provides a free 30-day trial and special pricing second month).
What we found
In going through the list of companies we see a wide variety of company types: asset managers, closed-ended equity funds, private-equity firms, investment-management companies, hedge-fund sponsors, non-deposit-taking trust companies, public-investment firm and investment funds. We are essentially looking at different legal or structural wrappers around the same core activity of managing capital for a fee or return on performance. The differences come down to whether they are the manager or the investment vehicle, if they manage external client money or their own capital, and whether investors can enter or exit freely.
The revenue models also vary: Asset managers are compensated by fees from assets under management (AUM), hedge funds generate fees and performance bonuses, private equity has carried interest (performance based share of profits), public-investment firms generate investment returns and mutual funds generate returns based on net asset value (NAV) performance.
When valuing firms like these we use models similar to those employed to value banks, insurance companies and REITS, with a heavy reliance on balance-sheet methods such as adjusted book value. You see below a number of our StockCalc valuations are close to the adjusted book valuations we have calculated. These companies are also held by investors for their dividends, and of note in this industry in recent years there has been a strong consolidation trend which we spoke to above. Some of these companies’ stock prices are up considerably over the past 12 months with the rising S&P/TSX index.
Let’s look at a couple of these companies:
Fiera Capital Corp. (FSZ-T) is a publicly owned investment manager that primarily provides its services to institutional investors, mutual funds, charitable organizations, and private clients. It manages separate client-focused equity, fixed-income, and balanced portfolios. The firm also launches and manages equity, fixed-income, and balanced mutual funds and income trusts for its clients. Montreal-based Fiera invests in the public equity and fixed-income markets across the globe with a focus on Canada. The company primarily invests in growth and value stocks of small-cap companies. Our models show upside, to FSZ-T, with the note it is down on a one- and five-year basis.
Cymbria Corp. (CYB-T) is a closed-ended equity fund launched and managed by EdgePoint Investment Group Inc. The Toronto-based fund invests in public-equity markets around the world. It also invests some portion of its portfolio in derivative instruments, privately held businesses or leverages its investments. Our models show Cymbria as fairly valued.
Stack Capital Group Inc. (STCK-T) is a public-investment firm engaged in venture capital that specializes in pre-IPO, late-stage and growth stages of a company. The Toronto-based firm invests in Canada and the United States. Our models and the analyst target are very divergent here. The weighted value has defaulted to analyst target based on historic data.
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from our models and analyst target data.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis. Brian Donovan, CBV is the President of StockCalc, a Canadian FinTech based in Miramichi, New Brunswick.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.