One big beneficiary of the tax bill: asset managers

Fund companies will reap benefits from lower taxes and repatriation.

Asset managers such as mutual fund companies are going to be one of the biggest beneficiaries of the new tax law, according to a new report from Moody’s Investors Service.

The Tax Cuts and Jobs Act is a kind of two-for-one deal for asset managers. It not only gives a big tax break to companies that manage money, but to the asset managers’ biggest clients: The wealthy.

The median tax rate for asset managers, such as T. Rowe Price, Franklin Resources and BlackRock Inc., dropped from 30.1% last year to 24.5% this year, based on Moody’s survey of company reports.

“Asset managers have historically paid a higher tax rate than many other corporations,” said Moody’s analyst Rokhaya Cisse, who was a co-author of the study. “Waddell & Reed, for example, will see its tax rate fall from 34% to about 24%.”

Like other companies, asset managers will also get a lower tax on undistributed foreign earnings, and many large asset managers have significant operations overseas. But the benefits of cash repatriation don’t stop there. Other companies that repatriate cash will need to park it somewhere, which could help fund companies that have significant money market capabilities, such as Federated Investors. Similarly, multinational companies could decide to add to their pension plans, which would also benefit asset managers.

Fund companies aren’t the only ones getting tax cuts. The new law drops the top income tax bracket to 37% from 39.6%. The top bracket begins at $600,000 for couples, up from $480,051 in 2017. While some of that savings will go to consumer spending, the wealthy tend to invest more than they spend.

High earners will also be looking for new investment products that reduce the effect of the bill’s new limits on the deductibility of state and local taxes. “Companies that cater to high-income individuals who are trying to manage their liability will probably need to reasses their lineup to be sure they meet investors’ needs,” Ms.

The law will help fund companies increase their already substantial profit margins. T. Rowe Price, for example, had a 33% profit margin in 2017, according to S&P Capital IQ. Franklin Resources sported a 28% profit margin.

None of this has been lost on Wall Street. The average asset management stock has gained 20.35% this year, according to Morningstar Inc., versus 17.1% for the Standard & Poor’s 500 stock index. Stock in T. Rowe Price has soared 60.3% over the past 12 months, according to Morningstar Inc., and BlackRock has jumped 44.38%. And, naturally, there’s an ETF for that: the ETF Industry Exposure & Financial Services ETF (TETF).