Who better to invest your money with than the managing entity for your favorite mutual funds?
In one sense, it eliminates a degree of risk because the manager gets his fees no matter how he performs. But what if the company owns equity interests in a variety of managers so that it is diversified?
That’s why a company like Affiliated Managers Group (AMG), with its dreadfully boring name, is worth a close look.
Affiliated Managers manages some $470 billion in assets across a range of classes and investment styles, and does so in three distribution channels:
- Institutional: Foundations, endowments, and both corporate and government retirement plans.
- Mutual Fund: Equity investments in names like Yacktman; Tweedy, Browne; Harding Loevner; Genesis and Artemis.
- High Net Worth: Really rich people.
How are things doing? Affiliated Managers’ latest earnings report beat expectations on the top and bottom lines, and there’s plenty of solid growth. Adjusted EPS increased 31% to $2.18 per share vs. $1.66 last year on a revenue increase of 26% to $541 million. The company managed all this on record net client cash flows of $13 billion and declining operating expenses.
I liked reading about the shift away from fixed income into stocks in the company’s conference call, and that they are well aware that one day this will reverse. They are laying groundwork for this return to bonds, so they aren’t getting hung up on chasing returns and being diligent about the future.
It’s also worth noting how other mutual funds hold this money manager in their own accounts. This includes funds from Eaton Vance (EV), Munder, Vanguard and T. Rowe Price (TROW). What better vote of confidence can there be when one’s competitors actually purchase stock in you?
As you might expect, in a company with little capex, there’s a lot of free cash flow with Affiliated Managers. It generated $472 million in 2010, $692 million in 2011 and $613 million last year.
Meanwhile, analyst consensus estimates are for AMG to earn $9.43 this year, which reflects the company’s own guidance of $9 to $9.70. Analysts also see 15% long-term growth. Now, with a stock price of $185, that means you’re looking at a stock trading at roughly 20 times estimates on 15% growth. I can justify a premium given the great cash flow, but even at 18 times estimates, the stock is still $20 overvalued.
I think Affiliated is in great shape and is certainly worth looking at. You can even overpay and probably be OK. I just don’t like to overpay in a market where equities are being juiced higher by the Fed. I prefer to find organic value.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.