Analysts believe investors will continue to move into stocks and rotate out of bonds, meaning another good year is on tap for asset managers.
The top five publicly traded asset managers’ stocks averaged a 46% return in 2013 — about 50% better than the S&P 500’s 30% gain. But after last year’s bull run, it’s going to be tough to find investments that provide such high returns. That’s why you need to stick to the best of the best when it comes to asset managers this year.
Who will be the big winners in 2014? Here are my top five asset managers to own.
With more than $8 trillion under management, BlackRock (BLK) has become a gigantic asset manager thanks to its exchange-traded fund business, which accounts for 64% of its assets under management.
Since the announcement of its acquisition of Barclays’ (BCS) investment products division in June 2009, BLK stock has achieved a total return of 94%. That’s good, but it still trailed the SPDR S&P 500 (SPY) by 18 percentage points over the same period. Its performance should be stronger given its dominance.
With the future of asset managers clearly in the hands of ETFs, iShares’ formidable market share suggests that Larry Fink and company have more good years ahead. When it comes to large-cap asset managers I see BLK stock as your best bet in 2014.
Waddell & Reed (WDR)
One of the oldest mutual fund companies in the U.S., Waddell & Reed (WDR) is still growing quarterly revenues and earnings by double digits. With $114 billion in assets under management, analysts expect WDR to report Q4 earnings of 78 cents on Feb. 4 — 28% higher year-over-year.
According to Investor’s Business Daily, 55% of WDR’s growth over the past 10 years has been organic growth, rather than growth-by-acquisition. When it comes to asset managers, few do it better.
Why is this important? Because WDR has been able to save the money for dividends, which have increased 80% since 2010. Currently yielding 2.1%, WDR stock pays out the exact same amount as BlackRock’s in terms of yield.
Income investors should know that WDR yield has stayed above 2% in 8 out of the last 10 years, with 2007 and 2013 being the exceptions. Combined with consistent capital appreciation, WDR has outperformed BLK in four out of the past five years. With the good times expected to last at least one more year, I expect the same outcome in 2014.
WisdomTree Investments (WETF)
Anyone who follows ETFs likely knows about WETF. That’s because its WisdomTree Japan Hedged Equity Fund (DXJ) gathered $9.5 billion in 2013, making it the second-most-popular fund next to the SPY. I recently gave it kudos for being one of the best funds in 2013 and although the DXJ is responsible for a considerable amount of WisdomTree’s growth in 2013, there are other reasons why I think this is one of the best asset managers anywhere.
WisdomTree, the fifth-largest ETF provider in the country, is also the fastest growing amongst asset managers. With $34.5 billion in AUM, its average ETF fee of 0.51% means it’s netting approximately $176 million in revenue annually, with 38% pre-tax margins.
But WETF is also growing AUM by approximately 8% per quarter. If it continues at this pace for the next couple of years, it will generate approximately $124 million in pre-tax income, considerably higher than where it’s at today. Earnings per share for WETF stock would be around 80 cents, and its forward 2015 P/E is around 23, which isn’t half bad for a stock that’s growing EPS by more than 50% annually.
WisdomTree’s future appears bright. In the December ETF Deathwatch list, only five of its ETFs appeared out of the total 61. Like all asset managers, it’s not perfect, but it is the only publicly traded ETF pure-play available. So if you believe in ETFs, as I do, this is the bet to make.
Artisan Partners Asset Management (APAM)
With approximately $97 billion in assets under management, Artisan Partners Asset Management (APAM) uses a decentralized and autonomous investment style that has made it very successful among asset managers. The stock went public in March 2013 at $30 per share, so investors who still held at the end of December were sitting on unrealized gains of 117% in just 10 months. That’s good in anybody’s book.
So what makes APAM stock so special? Quite simply, it has built its business upon a consistent philosophy and business model — those words are taken straight from the APAM Q3 investor presentation. While it might sound like hyperbole, the performance of APAM stock suggests otherwise.
Lipper ranks 93% of its assets under management in the first quartile, and Morningstar gives at least a four-star rating to 91% of its AUM. Anyone who has money with them probably isn’t looking for other asset managers to handle their money. Shareholders aren’t doing half bad either.
The key to all successful asset managers is asset gathering … or as they like to call it in the business, “net client cash flows.” In the third quarter, APAM grew its inflows by $2.1 billion, an annualized organic growth rate of 9.7%., right up there with WisdomTree.
Even though APAM stock has been hitting its 10-month high in recent days, its yield is still 2.6% — 50 basis points higher than BLK, WDR and WETF. If you like asset managers that handle big chunks of institutional money while still playing the retail mutual fund game, this is the smart choice.
Westwood Holdings Group (WHG)
I first became aware of the Dallas-based asset manager Westwood Holdings Group (WHG) when I read about its founder, Susan Byrne, in an article that appeared in Fortune magazine several years ago. Her firm has been doing great things outside the bright lights of Manhattan ever since.
In the past 10 years, WHG stock has kept up with other publicly traded asset managers and then some, achieving an annualized total return of 15.4% — almost eight percentage points higher than its peers.
Westwood hit Canadian business news in April 2012 when it hired away Patricia Perez-Coutts. At the time, she was an emerging markets star manager for Toronto-based AGF Management (AGFMF), along with the rest of her team. WHG quickly set up Westwood International Advisers in Toronto with the mandate of attracting money from outside the U.S. as well as providing advice to global funds at WHG.
Its mutual fund assets under management are the smallest of three segments in the company, yet they grew by 49% year-over-year to $2.4 billion at the end of September. A key reason for that growth was securing Perez-Coutts and her team. Unfortunately, the move also has them in court, so expect legal wrangling sometime this year.
While WHG is the smallest of all five in terms of both market cap and assets under management, it definitely can hold its own when it comes to competing with other asset managers. I like its future even more so since WHG opened the international office in Toronto.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.