by Zach | December 30, 2013 10:32 am
The stock market is about to wrap up a banner year. The S&P 500 has surged more than +29% through December 26 and is poised to deliver its highest annual return since 1997. And following several years of investors pulling money out of the market, they have returned in droves in 2013.
According to the Investment Company Institute, net new cash flows have been positive every month for equity funds in 2013. Conversely, net flows for bond funds have been negative each month since June. Unsurprisingly, that’s also when the word “taper” starting popping up everywhere.
This “Great Rotation” could very well remain a major investment theme in 2014 too. The Fed finally announced plans on December 19 to taper the amount of its long-term bond purchases. This drove the 10-year Treasury note above 3% on December 26 for the first since July 2011. And rates could very well continue to march higher as the Fed further winds down QE.
Rising long-term interest rates would continue to send bond prices lower and likely drive more and more investors out of bonds and into stocks. This alone could help drive equity prices higher in 2014.
Given the remarkable price gains and multi-billion dollar positive fund flows, it should come as no surprise that the ‘Investment Management’ industry is currently one of the hottest based on earnings momentum.
According to the Zacks Industry Rank, it currently ranks 11th out of 265 industries. That puts it in the top 5% of all industries.
Of course, not all asset managers will benefit equally from the “Great Rotation”. Investors should focus on those managers with a high percentage of assets under management in equities.
Below are 3 investment managers who are well positioned to benefit from a continuation of the “Great Rotation”:
Lazard is a financial advisory and asset management firm with origins dating back to 1848. The company had $176.5 billion in assets under management as of September 30, 2013. Approximately 82% of that was in equities.
Lazard has delivered 3 positive earnings surprises in the last 4 quarters, with an average beat of 36%. It is a Zacks Rank #1 (Strong Buy) stock.
Waddell & Reed (WDR)
Waddell & Reed is one of the oldest mutual fund complexes in the United States. It had $114 billion in assets under management as of September 30, 2013, with 79% of that in equities.
Waddell has delivered 5 consecutive positive earnings surprises and carries a Zacks Rank of 1 (Strong Buy).
GAMCO Investors (GBL)
GAMCO Investors asset manager and financial services company with $43.5 billion in assets under management. Over 90% of its AUM is in equities.
Thanks to strong net inflows and equity markets, GAMCO has delivered 3 consecutive positive earnings surprises. Expect this streak to continue. GAMCO is a Zacks Rank #2 (Buy) stock.
The Bottom Line
With investors likely to continue shifting out of bonds and into stocks, equity asset managers could have another stronger year in 2014. And these 3 are particularly well-positioned to benefit.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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