Invesco Ltd. (NYSE:IVZ) is up 25% year to date, and 10% over the past week alone. This thanks to a stellar start to the year with 1Q 2013 EPS that came in at $0.52, compared to $0.45 from the previous quarter and consensus estimates of $0.47. Tailwinds for the better-than-expected earnings were related to rising assets under management (AUM) and a stabilizing balance sheet.
At the end of 1Q 2013, AUM was up 6% year-over-year to $729 million. Revenue increased 5.2% sequentially, and the adjusted operating margin expanded to 38.4% from the 35.6% in the prior quarter.
Invesco Ltd. (NYSE:IVZ) is also looking to increase its focus on international and emerging markets. Near the end of 3Q 2012, Invesco formed a joint venture (JV) with an Indian asset management firm, Religare Asset Management. Another big key for Invesco is the diversification in its AUM by client base and asset class. At the end of 2012, roughly 30% of Invesco Ltd. (NYSE:IVZ)‘s client AUM was from outside the U.S.
Invesco Ltd. (NYSE:IVZ) does offer investors a solid dividend, one that yields 2.7%, and back in April the company upped its quarterly dividend by 41% over the prior quarter. Since 2009, the company has been increasing its dividend every year. However, with the recent run up in the stock is it too expensive? I think so, but don’t worry; there are other ways to play the rebounding investment-management market.
Although the recent run up in Invesco might make the stock a bit too expensive from a valuation standpoint, could Invesco Ltd. (NYSE:IVZ)‘s performance be a sign of things to come for its competitors?
From a valuation standpoint, Legg Mason, Inc. (NYSE:LM) is the most expensive. This comes after the investment firm managed to post 1Q EPS of $0.79, which was in-line with consensus estimates. Legg Mason, Inc. (NYSE:LM) is a global asset-management firm focused on proprietary mutual funds and separately-managed accounts (SMAs).
Earlier this year, Legg Mason, Inc. (NYSE:LM) completed the acquisition of London-based fund-of-hedge-fund firm, Fauchier Partners, from BNP Paribas Investment Partners. The acquisition is expected to be accretive to Legg Mason, Inc. (NYSE:LM)‘s earnings in the first year.
Legg Mason, Inc. (NYSE:LM) has been vigorously working on improving its profitability through key initiatives such as innovative product solutions to its client base, tapping sound investment capacities and expanding distribution relationships. After restructuring its debt in 2012, the firm’s interest expenses fell 29% in the first nine months of fiscal 2013 compared to the prior-year period.
Another key competitor, Lazard Ltd (NYSE:LAZ), utilizes a strategy that includes local and emerging markets in both equities and fixed income. This diversity has helped the company grow AUM to $167 million at the end of 2012, an 18% increase year-over-year.
Lazard Ltd (NYSE:LAZ) managed to post 1Q EPS of $0.28, below the $0.32 consensus estimate, citing lower investment-advisory fees related to delays from its merger and acquisitions backlog. However, despite the under-performance, the company expects its M&A segment to expand over the interim. I think the recent earnings miss might be a great time to buy into the stock.
In late 2012, Lazard Ltd (NYSE:LAZ) announced various cost-saving initiatives, with a target to realize about $125 million in annual savings from its existing cost base. Over the interim, the company expects revenue growth from defined benefit and defined contribution retirement-plan growth in developed economies. Meanwhile, longer-term revenue growth will be from increasing its AUM from Asia, Latin America and the Middle East.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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