• Shares of Ares Management LP (NYSE: ARES) The Carlyle Group LP (NASDAQ: CG), Apollo Global Management LLC (NYSE: APO) and Blackstone Group LP (NYSE: BX) have been trending a downward path in 2015.
• BofA Merrill Lynch’s Michael Carrier upgraded the rating on Ares from Neutral to Buy, while downgrading the ratings on the other three companies from Buy to Neutral.

The risk reward for investment in the alternative asset management segment is more muted at this point, Carrier stated.

Analyst Michael Carrier mentioned that the near-term performance of the alternative asset management segment is likely to be restricted by cyclical pressures. He added, however, that the long-term growth trends remain attractive for alternative managers as their product returns are generally superior to other traditional asset classes.

Carrier expects alternative asset managers to benefit from the growing institutional allocations and the largely untapped retail market. These managers are likely to see continued inflows into their existing strategies as well as step-out strategies.

“While the organic growth prospects are positive for the sector, these firms are exposed to market cycles as mark-to-market returns and distributions moderate in flat or down markets,” Carrier added.

The alternative asset management segment faces a less attractive return and distribution outlook, given the higher market valuation of the stocks, uncertainty around growth and waning market confidence.

“Additionally, as we are 13% below the 2016 street consensus economic net income (ENI) for the sector (and our distribution forecasts 12% below consensus), we expect there could be downward revisions to street estimates in 2016 which could limit the stocks,” the BofA Merrill Lynch report stated.

The ratings on Apollo, Carlyle and Blackstone have been cut given a less favorable risk reward this late in the cycle, while the rating on Ares has been raised given the stock’s relatively attractive valuation on fee-related earnings.

Ares

The price objective for Ares has been reduced from $19 to $18. The investment outlook for the company is favorable, given its strong risk adjusted returns across strategies, impressive fundraising ability and high percentage of more stable management fees, Carrier stated.

Apollo

The price objective for Apollo has been reduced from $22 to $18. The company is a leading asset management franchise in the industry. Apollo has expanded beyond its traditional strength in PE to drive healthy asset growth and is taking up new growth initiatives. The risk reward is balanced, the BofA Merrill Lynch report mentioned.

Blackstone

The price objective on Blackstone has been reduced from $40 to $33. The company is one of the leading and most diversified alternative asset managers in the industry. Lower contribution from fee related income, at this late stage in the cycle, is a weak point, Carrier stated.

Carlyle

The price objective for Carlyle has been reduced from $23 to $20. The company’s solid investment performance in private equity and its differentiated fundraising capability indicate a favorable outlook. The analyst added, however, that the risk/reward appears balanced.