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Why It's Time to Buy the Money Managers

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The fund companies that are poised for the long run.

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All it took was a historically powerful stock market move and retail investors are in love with the stock market again. Equity funds brought in more money than they lost for the fifth consecutive month as investor risk appetite continues to increase.

Strategic Insight released its latest fund flow data for the asset-management industry last week. August represented another solid four weeks for the global markets and, in turn, for retail funds. Analysts expect future equity flows to remain volatile, but also note that trends in both the retail and institutional channel continue to improve. For more on money managers, see What the Return of Money Managers Means for Investors.

Money managers like Franklin Resources (BEN) and Janus Capital Group (JNS) suffered rough stretches as the markets tanked. Assets declined due to market depreciation and investor outflows. However, as the markets have rebounded, investor confidence and industry flows have improved.

In the past six months, investors have piled in: T. Rowe Price (TROW) has popped 89% while Franklin Resources has surged 117%. The rebounding money managers are now fairly valued, according to research analysts covering the sector, but the long-term case for these companies remains intact: millions of Baby Boomers with trillions of dollars in savings looking to invest as they plan for retirement.

Daniel Fannon, an analyst at Jefferies that covers the asset managers, breaks down the latest numbers: Equity and fixed-income funds continue to experience positive flows (with fixed income continuing to be the biggest beneficiary) as investor risk appetites continue to return to normal, he says.

Aggregate equity inflows equaled $12.2 billion, fixed-income inflows were $43.1 billion, while money-market funds experienced outflows of $46.7 billion.

Fannon notes that firms such as Franklin Resources, BlackRock (BLK) and Invesco (IVZ) are leveraging their broad product offering of fixed income and equity products as well as strong relative investment performance to attract flows.

In terms of relative strength for equity flows in the month of August, BlackRock, Janus Capital Group and Waddell & Reed Financial (WDR) exhibited the highest level of organic growth. In contrast, T. Rowe Price's equity flows were notably weak, the analyst says, with outflows of $223 million.

The money managers have benefited as the market has rallied. Now, J. Jeffrey Hopson and Joseph Seibel, analysts at Stifel Nicolaus, say that valuation for of the group is generally trading in the high end of its historical range P/E, at 19.9 times forward EPS estimates. The historical average is 17.3.

With the strong markets, solid flows, and controlled expenses, the third-quarter and fourth-quarter earnings picture looks much brighter, the analysts argue.

Hopson and Seibel currently have Buy ratings on Franklin Resources with a price target of $115, BlackRock ($224), Janus Capital Group ($17) and Waddell & Reed Financial ($31).

Risks for the money managers that hand-wringers point out: reputational problems from underwhelming performances; companies cutting or eliminating 401(k) matches; the prospect of another downturn in the market; and the concern that investors will parachute out of active stock management and into cheaper alternatives.

Still, despite these worries, the broader tailwinds benefiting these companies remain intact.

Long-term bulls on this sector are optimistic because, they argue, postwar babies need to build retirement assets and that will prove positive for mutual funds, trust companies, financial advisors, and money managers.

There are 75 million Baby Boomers in this country with a lot of cash to put to work: $13.4 trillion in retirement assets as of March 31, according to the Investment Company Institute.

"The boomer effect will be real," says Greggory Warren, analyst at Morningstar. "They will need to stay invested for longer, just to make up for the decline in assets that occurred last year."
No positions in stocks mentioned.
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