DCF for an Asset Management firm
I Need to create a DCF for an Asset management firm.
To forecast the Revenue I Need to forecast AuM as revenue is a percentage of AuM (management fee).
Future AuM is driver by two ways:
- Net Inflows (Outflows)
- Positive Product Returns (Losses) e.g. Dow Jones
So I Need to forecast Both options. How? I do have historicals for AuM, Returns and therefore net inflows (outflows) and revenue. But how can I actually forecast Net Inflows and Returns of the underlying product (e.g. Dow Jones)
Let's break this down:
More simply though, if you have a rate of return for the firm over time, you can use that with the expectation that major shifts in investment style won't change.
For example, you may notice that the equity funds for a company have delivered consistent outflows for a period of years: it would probably be prudent to forecast similar outflows going forward. Other areas may have inflows or outflows though and it's moreso a matter of your understanding of the company as to how to model those.
Does that help? Happy to clarify if anything I have written out here doesn't make any sense or isn't very clear
Tranks!
1) the Problem is that historical Asset class Returns are mostly Post-Covid, so much volatility. For instance one Asset class is German Medium Cap Stocks. The average of historical years is -8%.
I habe thought of using the average MDax Return as a Proxy for the future. Its Average Return is 6%. So I could just forecast 6% p.a. over next five years. Would that be wrong? Also I thought of building an Average until I reach the 6% in the last (exit) year. What would younrecommend?
2) Additionaly I have the following Problem. How would you estimate full year stock performance for 2024 with following historicals:
2022: +6%
2021: +3%
2022: -27%
2023:-2%
01/24 - 06/24 (six months): +13%
How do you calculate full year Return for 2024. How would the calcination changes of it would be absolute values:
2022: +100
2021: +17
2022: -45
2023:-7
01/24 - 06/24 (six months): +23
How do you calculate full year Revenue for 2024 for absolute values.
3) Forecasting Net Inflows:
I dont have any information about the firm. I thought of Laged Return variables as growth rates for net Inflows. So if Chinese Stocks have a Return of 6% in 2026, Net Inflows for the Chinese Fund will be +6% in 2027 as historical Returns are a major driver for net Inflows (outflows). Is this approach wrong? Inkasso thought of forecasting Net Inflows as % of last year AuM.
4) How can one forecast cycles ( e.g. For stock market with récessions etc)
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