The recent market volatility has had an outsized impact on traditional asset managers such as T. Rowe Price (TROW), which has seen its AUM fall as its funds are more tilted towards growth stocks. For those looking to diversify their exposure in this space, alternative asset managers such as Ares Management (NYSE:ARES) may fit the bill. This article explores why ARES may be an ideal pick for those looking for steady and strong income growth, so let’s get started.
Ares Management has been in business since 1997, and is home to 2,195 employees across over 30 offices worldwide. Its three main lines of business include Credit, Private Equity, and Real Estate, and is the external manager for well-regarded investment vehicles such as the BDC Ares Capital (ARCC) and the commercial mortgage REIT Ares Commercial Real Estate (ACRE).
While ARCC and ACRE are both higher yielding, ARES makes up for it with steady fee income that it generates from managing these and other investment funds. At present, ARES has $325 billion in assets under management, spread across the aforementioned key asset classes.
Unlike stock mutual funds, which are subject to daily market swings and investor redemptions, which often occur at bad times, when the market is down, ARES enjoys long-lived locked up capital. This enables it to create investor value over the long term.
This is reflected by ARES’ impressive 12% annualized AUM growth over the past decade. As shown below, this growth is expected to ramp to 15% CAGR over the next 4 years, driven by annual growth in the mid-teens across North America, APAC, and Europe.
ARES maintains its impressive growth trajectory as global investors have shown an appetite for reliable income and premium returns over the liquid stock market with less volatility. This is reflected by strong repeat business from existing investors, who accounted for 90% of its direct capital raise during the first quarter of 2022. This helped to drive a 57% increase in ARES’ AUM on a YoY basis to $325B, and fee-related earnings increased at a slightly faster pace of 59% over the same period, reflecting positive operating leverage through scale.
Looking forward, ARES should see continued avenues, especially considering that its share of the total addressable market remains tiny, at just 0.4% of the global $91 trillion, as shown below.
Moreover, near-term growth may be supported by anticipated robust infrastructure spending as well as global wealth management, as noted during the recent conference call:
We believe that infrastructure needs globally will be significant in the coming decade driven by population and economic growth, increasing privatization of infrastructure assets the global energy transition and the shift to sustainable and digital infrastructure. The team is integrating well, we’re having positive fundraising discussions and we expect to have more to report on this next quarter.
We believe that our infrastructure debt business is uniquely positioned to meet the need for capital in this space by offering a variety of credit solutions across industries and geographies. We continue to expand our Ares Wealth Management Solutions business which we believe is the second largest wealth distribution platform owned by any alternative manager. The group now has over 105 professionals and we are seeking to expand our geographic reach into new overseas markets and to enhance our capabilities.
Risks to ARES include a potential for a recession in the near term, which could lower returns in its investment vehicles and slow down AUM growth. Meanwhile, ARES maintains a strong BBB+ rated balance sheet. This lends support to its 3.4% dividend yield, which is covered by a 94% payout ratio, based on Q1’22 EPS of $0.65.
Notably, ARES’ dividend has more than doubled since the end of 2018, from $0.28 to $0.61 per quarter, and I don’t see the pace slowing down, as analysts anticipate 24-39% EPS growth over the next 4 quarters starting in Q3.
As such, I see the current stock price of $72.71 with a forward PE of 22.5 as being justified, considering ARES’ track record and growth estimates. Sell side analysts have a consensus Buy rating, with an average price target of $91. This translates into a potential one-year 29% total return including dividends.
ARES has seen significant growth over the past decade, and this is expected to continue in the coming years. It’s also well-positioned to capitalize on the growing global wealth management and infrastructure markets, with less volatility than the stock market. Furthermore, it rewards shareholders with a covered and fast-growing dividend yield. I believe that ARES is a compelling long-term investment at current levels.