Money management stocks may not repeat success of '07

As 2008 gets under way, publicly traded money manager stocks' ability to hold up to the market pressure that felled other financial services stocks last year is being questioned.
JAN 14, 2008
By  Bloomberg
As 2008 gets under way, publicly traded money manager stocks' ability to hold up to the market pressure that felled other financial services stocks last year is being questioned. Publicly traded money manager stocks produced winning returns in 2007. However, the money management industry was down 10.58% year-to-date through Jan. 9, according to Morningstar Inc. of Chicago. The financial services sector, of which the money management in-dustry is a part, was off 5.2%, and the Standard & Poor's 500 stock index had fallen 3.97% during the same period.

MORE CAUTION

Industry experts warn not to read too much into the numbers, as the year just started. But there is a definite feeling that money management stocks — which finished last year up 10.39% — will have a much harder time generating solid returns this year. The financial services sector finished 2007 down 14%, and the S&P 500 ended the year up 5.49%. While analysts were bullish on the money management industry at the beginning of last year, fear that the overall stock market will continue to head south has caused them to be more cautious, said Eric Fitzwater, a senior analyst at SNL Financial, a Charlottesville, Va.-based research firm. "I would say the sentiment right now as a whole for the group is neutral at best," he said. For example, a company such as T. Rowe Price Group Inc. (TROW) of Baltimore — shares of which finished 2007 up 41% — is being looked at with less optimism. "Increases in market volatility, an inability to sustain superior fund performance or an overall bear market could all cause ... growth [in assets under management] to slow," Morningstar analyst Andrew Richards wrote in a report at the end of last year. The market appears to agree. T. Rowe's stock was down 17.2% year-to-date through Jan. 9. Janus Capital Group Inc. (JNS) of Denver — shares of which finished up 51.3% last year — is being viewed with similar caution. The company had a great year in 2007 because of optimism over management's moves "to motivate employees, reinvigorate the culture and improve investment and financial performance," Michael Hecht, an analyst at Bank of America Securities LLC of New York, wrote in a report at the end of last year. Much of that, however, was already baked into the stock price at the end of the year, he wrote. As a result, Janus was too expensive to recommend, Mr. Hecht concluded. The stock may not be too expensive for long; it was down 15.5% year-to-date through Jan. 9. BlackRock Inc. (BLK) of New York — shares of which finished 2007 up 45.1% — is another example of a stock that faces more skepticism. Although it has a huge presence in fixed income and money management, two areas that are expected to do well, its stock was down 7.85% year-to-date through Jan. 9. Examples such as T. Rowe, Janus and BlackRock indicate that any drop-off in the performance of money manager stocks has less to do with the companies themselves and everything to do with the mood of the market, industry experts said.

MARKET'S DIRECTION KEY

"For the majority of asset managers, the biggest driver is the direction of the markets," said Robert Lee, an analyst with New York-based investment bank Keefe Bruyette & Woods Inc. Investors are less inclined to invest in down markets, he said. That puts pressure on the ability of money management companies to increase revenue, Mr. Lee said. For that reason, it may be hard for money manager stocks to outperform in 2008, agrees Ben Phillips, managing director and head of strategic analysis at Putnam Lovell NBF Securities Inc. of New York. "Asset-based fees will get lower, and revenues will contract," he said. But money managers will remain profitable, Mr. Phillips said. They tend not to have a lot of capital needs, and have a lot of cash on hand, he said. As a result, Mr. Phillips said, he expects money managers to continue to invest in their businesses. That means there will still be mergers-and-acquisitions activity in the industry; however, he said, firms will probably be a little "pickier" about parties with which they get in bed. Because money managers tend not to have balance sheet issues, those served by money managers — such as mutual fund investors — needn't worry too much about a downturn in the stocks, said Jeff Tjornehoj, a Denver-based analyst with Lipper Inc. of New York. "The stock price is the market's assessment of the future value of that manager's earnings," he said. "For the fund investor, it really means very little." About the only thing that a money manager can do is cut back on customer service, and that seems very unlikely, Mr. Tjornehoj said. And it isn't as if all money managers would fare the same in a downturn. For example, companies such as AllianceBernstein Holding LP (AB) of New York are poised to grow, because with more than half its assets under management invested abroad, it has a broader geographic reach than most money managers, Mr. Lee said. The stock finished 2007 down 1.2% and was off 1.3% year-to-date as of Jan. 9. Federated Investors Inc. (FII) of Pittsburgh finished last year up 23.1% and was up 0.3% year-to-date as of Jan. 9, largely because it is one of the largest money fund managers. Investors, fearing a downturn in the markets, are pouring money into money funds. As a result, Bank of America Securities rates Federated a "buy." David Hoffman can be reached at [email protected].

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