Assets under management, also known as AUM for short, is the most important thing for asset management companies like T. Rowe Price (NASDAQ:TROW) and BlackRock (NYSE:BLK). That is because the fees these companies collect are expressed as a percentage of AUM. Higher AUM leads to higher fees and profits for asset managers. A decline in AUM leads to a decline in fees and profits.
There are two ways for an asset management company to increase its AUM. One is by attracting new money from investors and the other is to rely on a bull market to increase the price of the assets held by the company. This makes asset management companies heavily dependent on financial markets. For example, during the 2008 bear market, AUM at TROW fell from $400B to $276B. As a result, earnings per share dropped 31% between 2007 and 2009, and the stock plunged by 70% from its 2007 high.
Fast-forward to August, 2021, T. Rowe Price stock reached a new record of $225. However, the recent weakness in global markets, which saw the S&P 500 index briefly dipping into bear market territory last month, took its toll on TROW, as well. As AUM fell, the stock suffered much more than the general market, crashing by ~50% to under $113 a share. The good news is that the best time to invest in a quality asset management company is precisely when AUM have already fallen substantially due to a general market decline. Has this moment arrived for TROW stock? We don’t think so.
The daily chart above puts TROW ‘s 50% plunge into Elliott Wave perspective. It can easily be seen as a five-wave impulse, labeled 1-2-3-4-5 in wave A, where the five sub-waves of wave 3 are also visible. Unfortunately for the bulls, impulses only form in the direction of the larger pattern. This means that even though a three-wave recovery can soon be expected, the bears would still have the upper hand.
Once wave B is over, somewhere near the resistance area of wave 4 around $160, wave C should drag the stock below $100. We won’t be surprised to see TROW revisit its 2020 pandemic lows near $90 a share before things really start to improve. The short-term positive outlook is supported by a bullish RSI divergence between waves 3 and 5 of A. However, wave B would only complete the bearish 5-3 cycle and set the stage for the next wave of selling in C. Given the high quality of TROW as a business, the stock would be a very worthy investment below $100. Until then, we remain on the sidelines.