3 Key Trends & 1 Top Pick From Credit Suisse's Initiations On 5 Asset Managers

On June 3, Credit Suisse analysts Craig Siegenthaler and Ryan Sullivan published a report "Perspective on the Secular Shift to ETFs, Alts, and High Active Share," updating industry trends, and initiating coverage on five smaller cap asset managers, including:

High growth ETF manager:

• WisdomTree Investments WETF - Outperform, $27 PT; $2.83 billion cap, 1.55 percent yield.

High growth alternative credit manager:

• Ares Management LP ARES - Neutral, $23 PT; $4.1 billion cap, 5.2 percent yield.

Traditional active managers:

• Artisan Partners Asset Management APAM - Neutral, $51 PT; $3.2 billion cap, 5.5 percent yield.
• Manning & Napier, Inc. MN - Neutral, $12 PT; $177 million cap, 5.3 percent yield.
• Virtus Investment Partners VRTS - Neutral, $142 PT; $1.3 billion cap, 1.8 percent yield.

Tale Of The Tape - Past Year

WisdomTree's 12 month outperformance vs this peer group is expected to continue moving forward according to Credit Suisse.

Credit Suisse - Coverage Universe & Ratings

Related Link: Susquehanna: Positive on Blackstone, Alternative Assets Becoming The 'New Active'

Credit Suisse - Asset Management Trends

Theme 1: The Secular Shift to High from Low Active Share:

"A portfolio that is identical to its benchmark would have an active share percentage of zero. Sources of active share include (1) holding different weightings of stocks versus the benchmark, (2) excluding stocks that are in the benchmark, and (3) adding stocks that are not in the benchmark."

Theme 2: The Secular Shift to ETFs from Mutual Funds:

"Key Drivers of Secular Growth: (1) The ETF structure is superior to the Open End Mutual Fund (2) Passives & Smart Beta have stronger five year performance than active managers (which also have higher costs and are less tax efficient)."

Theme 3: The Secular Shift to Alternatives from Traditionals:

Strong performance across illiquid funds such as: private equity, real estate and credit is expected to attract large amounts of capital moving forward.

Credit Suisse also noted large alternative managers have competitive advantages compared to banks, including: long-term capital, more attractive compensation structures and less regulation.

Related Link: Blackstone's Michael Nash Talks Debt And The Real Estate Cycle

Credit Suisse Top Pick - WisdomTree: Initiate Outperform, $27 PT

During the past 52-weeks WisdomTree shares have traded in a range of $9.57 to $22.73, closing up over 5 percent on June 3, the day Credit Suisse published its research note.

Despite the strong performance of WETF shares during the past 12 months, CS believes there is still ~30 percent upside potential for the company based upon its sizeable future growth and EPS projections.

Notably, the CS performance forecast for WETF does not project the tremendous increase of fund inflows experienced in Q1 2015 to continue for FY 2015.

Credit Suisse projects WisdomTree's EPS to increase "by 260% from 2014 through 2018," at ~38 percent growth annually.

Credit Suisse believes that the secular tailwinds from the growth of ETFs, will propel WisdomTree's growth beyond its asset manager peer group; specifically citing that WETF's PEG is lower than Facebook, as a way to help investors gauge the opportunity.

The Credit Suisse $27 target price for WETF shares was derived by applying a 22x multiple on CS 2017E cash earnings, (compared to an industry average of 13.5x due to WisdomTree's anticipated high rate of growth).

Credit Suisse - WETF Risk Factors

1. ETF Risk: Investor interest in ETFs could cool off, resulting in a loss of assets under management.
2. FX Risk: A weak US dollar could dampen interest in WETF "currency hedged non-US equity products," which have been a significant source of near-term top-line revenues.
3. Concentration Risk: about 60 percent of WisdomTree's AUM is concentrated in just two ETF's (DXJ, HEDJ); "Meaningful outflows from either of these products could impact WETF's ability to generate profits."