Asset Managers: In the Money
Were he alive today, bank robber Willie Sutton, who once explained that he robbed banks because "that's where the money is," would tell us that the money now is now with the asset managers. Credit Suisse agrees: The brokerage initiated research coverage of the industry on June 27 with an overall bullish stamp, and gave six of the 13 money-management stocks it now covers the equivalent of a "buy" rating. The rest of the coverage group got "holds."
Given the long bull market and America's passion for investing, it's no surprise that the market isn't giving these stocks away. Credit Suisse analyst Thomas Gallagher points out the median company trades at about 18 times 2008 earnings estimates, a 5% to 7% premium to where the group typically trades. But with a five-year industry outlook for nearly 10% earnings growth annually, on average, he sees the potential for stocks in the group to log average price gains on the order of 20% over the next year.
Among the plusses is that you don't have to spend a lot of money to make money in the money-management business. The biggest costs are keeping systems up to date and hiring analysts to cover global markets farther and farther from home. But assets under management can grow significantly without companies having to spend appreciably more to manage them, leading to impressive profit margins.
And grow those assets will. Over the next several years, a tailwind for money flows will come from more investors shifting more of their money into foreign holdings and investments beyond plain-vanilla stocks and bonds, including hedge funds and private equity. "Aside from the view that global and alternative products have a good chance of outperforming traditional domestic strategies over the mid to longer term, we believe these asset classes are underrepresented," writes Gallagher in a 78-page report.
As always, investment performance will separate winners from losers in the battle for assets, says Gallagher. But he adds that performance may not be measured by the traditional; that is, market index benchmarks we use today. Money managers who cater to institutions instead of individuals may instead be graded by how successful they are in funding a specific liability -- a pension, say.
That's a familiar concept for insurers using fixed-income instruments, but a new one for active managers using an array of asset classes. The market for so-called liability-driven investing in the U.S. could be 5% to 10% of the $5 trillion pension market, Gallagher says. Another frontier: managing the massive payout as aging investors start to withdraw their life savings. Mutual fund managers with a strong presence in the annuity business will thrive.
Here's a closer look at the stocks Credits Suisse is recommending:
Invesco (symbol IVZ) is the best bargain in the group, selling at just 14 times the $1.85 per share that Credit Suisse expects the company to earn in 2008. The stock closed at $26.30 on June 27, up 0.8%. Best known here for its AIM mutual funds, Invesco has $471 billion in assets under management, including its Invesco funds in the United Kingdom and its PowerShares exchange traded funds. The company is well positioned in the private wealth management and ETF markets, but continued lackluster performance of the AIM funds is a risk. The stock could trade up to $34 within 12 months, says Credit Suisse.
T. Rowe Price (TROW), on the other hand, boasts a consistently impressive track record, but still is reasonably priced at 19 times estimated '08 earnings of $2.78 a share. The stock closed at $52.01, up 0.6%. The company is building a presence overseas, has a strong 401(k) niche and is a leader in the target-date mutual fund market, where industrywide assets have grown at an annualized rate of 43% since 2004. The company's focus on lower-growth traditional investment strategies leaves it a little more sensitive to the whims of fickle investors. Look for the stock at $69 within a year, says Credit Suisse.
Fortress Investment Group (FIG) is a way to get in on the private-equity boom. Some $20 billion for the company's $37 billion in assets under management is invested in deals assembled for sophisticated, well-heeled private investors; another $11 billion is in the hedge fund business. Credit Suisse estimates that Fortress's assets will increase by 30% in 2007 alone, from money flowing in and from appreciation of investments. The company's global management team has an exceptional track record. But a complicated tax arrangement, specific to Fortress's publicly traded partnership structure, clouds the company's outlook a bit. Fortress shares closed at $23.25, up 5.4%. Credit Suisse gives the stock a 12-month target price of $32.
AllianceBernstein (AB) and Franklin Resources (BEN) are Gallagher's favorites to profit from investors growing embrace of foreign securities, and from the globalization of markets in general. Alliance closed at $86.99, up 3.6%, while Franklin was up 0.9%, to $133.50. Alliance has been opening offices overseas, and non-U.S. investors now make up 37% of clients. Assets under management are 56% global and 44% U.S. Twelve-month target price: $105.
At Franklin -- known for its Franklin fixed-income funds, its Templeton global funds and its Mutual Series funds, which focus on bargain-priced holdings -- international assets have grown twice as fast as U.S. assets since 2002. Twelve-month target: $176.
Finally, Credit Suisse recommends Affiliated Managers Group (AMG), essentially a collection of small- and midsize-company mutual funds, including Tweedy Browne, Friess Associates (manager of the Brandywine funds) and Third Avenue. Affiliated's modus operandi is to acquire majority stakes in high-quality boutique fund managers while preserving the entrepreneurial culture of the funds with generous revenue-sharing arrangements. Affiliated's stock closed at $127.94, up 1.7%. Credit Suisse thinks it could see $155 within the year.