Rising Passive Flows Will Erode Active Management Fundamentals

Key Takeaways

• Persistent outflows and pricing pressures from passive investing and digital platforms challenge Liontrust's revenue growth and competitive positioning.
  
• Increasing regulatory demands and ongoing fund underperformance compress profitability and undermine the sustainability of Liontrust's core strategies.
  
• Liontrust's strong brand, strategic diversification, and operational efficiencies position it to benefit from market shifts toward active and sustainable investing, supporting resilient growth and profitability.

Catalysts

About Liontrust Asset Management

Liontrust Asset Management Plc is a publicly owned investment manager.

What are the underlying business or industry changes driving this perspective?

• The accelerating structural shift toward low-cost passive investing and ETFs is likely to drive continued outflows from active managers, undermining Liontrust's core strategies and resulting in persistent pressure on assets under management and revenue growth, as traditional active products are increasingly disintermediated.
  
• The relentless rise of digital wealth platforms and the proliferation of fee-free or ultra-low-fee investment options threaten pricing power for incumbent asset managers like Liontrust, which has already signaled a downward trend in gross revenue margin, making sustained net margin expansion increasingly difficult.
  
• Heightened regulatory scrutiny on ESG and responsible investment standards is expected to increase compliance costs and operational complexity for Liontrust's flagship sustainable strategies just as industry-wide demand cools, compressing profitability in what was previously a growth area for the business.
  
• Ongoing underperformance and style headwinds in key teams-most notably the UK economic advantage and sustainable funds, both significantly exposed to small
• and mid-cap growth-risk exacerbating reputational harm, triggering client redemptions, and leading to further contraction in fee income.
  
• Liontrust's relative lack of scale compared to mega-managers in a consolidating industry landscape places the company at a long-term competitive disadvantage in distribution, technology investment, and margin resilience; this subscale position directly endangers future earnings stability and capital retention.

Liontrust Asset Management Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Liontrust Asset Management compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Liontrust Asset Management's revenue will decrease by 6.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.1% today to 15.6% in 3 years time.
• The bearish analysts expect earnings to reach £17.0 million (and earnings per share of £0.29) by about July 2029, up from £9.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £21.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.5x on those 2029 earnings, down from 20.7x today. This future PE is lower than the current PE for the GB Capital Markets industry at 12.8x.
• The bearish analysts expect the number of shares outstanding to decline by 3.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Shifting market dynamics are creating a more favorable environment for active management, with the U.S. market's outperformance and concentration likely to reverse, potentially increasing demand for active strategies and boosting Liontrust's revenue and assets under management.
  
• Liontrust's established and highly-rated brand, particularly in sustainable investing, places it at the forefront as ESG and responsible investing continue to be long-term megatrends, supporting recurring client inflows and long-term fee growth.
  
• Strong performance and inflows in certain flagship funds, like the European Dynamic and Global Innovation strategies, demonstrate the company's ability to capitalize on evolving investment themes, which can offset broader industry headwinds and contribute to higher revenue and earnings.
  
• Operational improvements, such as adopting scalable technology platforms (BlackRock's Aladdin, BNY Mellon outsourcing), are expected to drive cost efficiencies and operational scalability, which can expand net margins even if topline growth is moderate.
  
• Strategic international expansion and a diversified product lineup, including alternatives and multi-asset, reduce reliance on a single geography or investment style and can provide greater resilience in revenue and earnings through financial cycles.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Liontrust Asset Management is £2.1, which represents up to two standard deviations below the consensus price target of £3.93. This valuation is based on what can be assumed as the expectations of Liontrust Asset Management's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.5, and the most bearish reporting a price target of just £2.1.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be £109.4 million, earnings will come to £17.0 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of £3.4, the analyst price target of £2.1 is 62.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.