Asset management companies basically run mutual funds and provide investment advisory services to high net-worth individuals and institutions.
They are an interesting sector to follow and might offer investors a more profitable way to play any expectant bull market.
The pro’s and con’s of asset managers
Asset management is a very lucrative business. Most revenues are generated based on the value of Assets Under Management (“AUM”). Though financial market fluctuations impact AUM levels, these companies are pretty consistent moneymakers. A majority earned substantial profits even through the 2008-2009 financial crisis.
AUM is the industry’s key indicator. Significant increases in AUM are mostly gained through market appreciation or acquisition of other, typically smaller, asset managers rather than inflows from new investors. The competition for investor assets is fierce. Various exchange traded funds, low-cost index funds, and the allure of hedge funds have all greatly reduced the appeal of the legacy mutual fund.
The leverage asset manager stocks have over the general market during a bull run might be of the most interest for investors. From the stock market bottom in 2009 to their high in 2013, the average share price for a sample of mutual fund providers has exploded about 3.5 times compared to an approximate 2.5 times rise in the S&P 500. At the same time, some of these firms paid dividends that yielded between 1% and 3%.
Buy the manager not the product
Investing in the manager seems preferable to buying their product when expecting a market rise. Some of the major publicly traded firms I follow are:
Franklin Resources, Inc. (NYSE:BEN), which operates as Franklin Templeton Investments, is a fairly large and very efficient asset manager with a roughly 25% cash earnings profit margin and average compensation/distribution costs of about 56% of revenues. The company announced recent quarterly revenues of $2.0 billion versus $1.8 billion in 2012 and net income of $573 million, compared to $503 million from the previous year.
Franklin Resources, Inc. (NYSE:BEN)’s AUM was $823.7 billion at March 31, 2013, up 5% during the quarter. The increase was primarily due to $24.5 billion in market appreciation and $18.3 billion of net new flows, mostly in taxable global fixed income products. A solid performer, assets increased 14% year over year, primarily due to market appreciation and roughly 3.6% of net new inflows.
T. Rowe Price Group, Inc. (NASDAQ:TROW) is one of the most efficient managers. It has around a 29% cash earnings profit margin and very low compensation/distribution costs, around 42% of revenues. The firm reported net sales of $816 million and net income of $242 million for its latest quarter. On a comparable basis, sales were $729 million and net income was $198 million in 2012.
Their AUM at March 31 totaled a record $617.4 billion. Net cash inflows during the quarter were a lackluster $3.3 billion or around 2% higher annualized. Lately T. Rowe Price Group, Inc. (NASDAQ:TROW) has specialized in target-date portfolios. These invest in multiple underlying funds that automatically adjust to a more conservative allocation as the client ages. Gaining in popularity, target-date funds attracted virtually all of the quarterly inflow.
Eaton Vance Corp (NYSE:EV) is a smaller asset manager with consolidated AUM around $260 billion. The company might be the most adaptable, however. Their innovative focus on current popular investment trends has helped assets grow at around a 9% annualized rate over the last couple of quarters. Floating rate income, commodity and currency based, and other alternative type funds were the main drivers of growth.
The company also reported recent quarterly earnings of $64 million, with a cash earnings margin around 18%, up from $53 million in the same quarter the year before. Revenue rose 9 percent to $332 million from $305 million, as investment and advisory fees rose 11% to $277 million.