One of Eaton Vance Corp (NYSE:EV)’s specialties, floating-rate funds, offers promise for new asset expansion. Floating-rate funds hold securities that pay varying coupons dependent on interest rates. Investors are snapping up floating-rate funds to prep for rising rates in the future.
At 16 times earnings, investors can get access to a high-quality asset manager with a moat in its niche. Rising rates and sustained equity performance should lead to high single-digit earnings growth. Also, the company offers an “option” in a new ETF and mutual fund hybrid, which Eaton Vance Corp (NYSE:EV) executives believe could lead to substantial forward licensing revenue. That option doesn’t appear to be priced in at the current valuation.
This asset manager is one of my favorites as it deals almost exclusively with money market funds. The company reported in its most recent quarterly report that it managed $284.59 billion in money market funds. Total AUM stands at $381 billion.
Money market funds offer little to asset managers in a low rate environment. Despite the fact that nearly 75% of AUM is attributed to money market funds, only 43% of Federated Investors Inc (NYSE:FII)’ revenue came from its money market products. Fee waivers put downward pressure on fee revenue.
Rising rates offer the potential for higher fees on money market funds. If Federated Investors Inc (NYSE:FII) can add just 5 basis points to its fees on its money market funds, it will send $142 million to operating income, pushing bottom line net income higher by 50% or more.
With or without higher fees on money market accounts, Federated Investors Inc (NYSE:FII) is profitable and trading at 16 times forward earnings expectations, in line with Eaton Vance and T. Rowe Price Group, Inc. (NASDAQ:TROW). However, it offers the largest upside on one-time fee increases plus the highest dividend of the bunch at 3.22%.
The Foolish bottom line
Asset managers can be an excellent investment. Their assets are “sticky” as customers do not move funds frequently, leading to stable income. Additionally, bottom-line income swells with a rise on Wall Street.
Those seeking levered upside with limited downside on the performance of the financial markets might want to take a look at the leading asset managers.
The article 3 Asset Managers Bankrolled by a Bull Market originally appeared on Fool.com and is written by Jordan Wathen.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Federated Investors. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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