They say, “the house always wins.” While that saying is usually attributed to Las Vegas casinos, the old adage is a perfect fit on Wall Street, too. Let’s face facts: Even the good guys on the Street still make a killing. Whether your mutual fund or exchange traded fund (ETF) flies like an eagle or drops like a stone, you still pay fees to the portfolio manager quarter after quarter, year after year.
It’s good to be an asset manager on Wall Street.
But, it’s even better to be one of the asset manager’s shareholders. Being an asset manager is one of the least capital-intensive operations on Wall Street. As a result, many enjoy big-time profit margins as we keep paying our fees (even when it comes to cheap index funds).
As for those index funds, ETFs are a major source of growth for the industry. As of the second quarter of 2015, assets in ETFs have ballooned to $2.971 trillion invested across more than 5,820 funds. That’s a lot of easy-to-obtain fee income.
At the end of the day, these fees translate into hefty earnings and capital appreciation for asset managers. Luckily for investors, most of them are publicly traded.
Here are three asset manager stocks to buy today.
Winning With Wall Street — Asset Managers To Buy: BlackRock
Asset manager BlackRock’s (BLK) purchase of struggling British bank Barclays (BCS) iShares unit during the Great Recession could have been one of the best forward-thinking business decisions of all time. It allowed BLK to corner the ETF market in its infancy, and cemented the firm as a premier asset manager across ETFs, mutual funds, alternatives, real estate, you name it.
Today, BlackRock manages more than $4.72 trillion worth of investor’s money. As Wall Street’s largest asset manager, BLK is just minting profits. The latest quarter is a testament to that.
BlackRock managed to see a 5% year-over-year increase in revenue, primarily driven by fees. Operating income popped 10% as well. Both metrics are impressive when you are dealing with an asset manager the size of BlackRock.
The key is BLK’s diversified status across product lines. Flows into higher-fee active and iShares products counteracted outflows from lower-margined institutional cash and index funds. BlackRock benefits from the fact that most investors — especially institutional ones — won’t switch managers once they’ve established a relationship with them. Odds are, those assets under management will stay put.
BLK stock currently sports a forward P/E of 13 and a dividend yield of nearly 3%.
Winning With Wall Street- Asset Managers To Buy #2: T. Rowe Price Group
Founded by a man whom many market pundits have called the father of growth investing, Thomas Rowe Price, T. Rowe Price Group (TROW) has been a mutual fund and asset management powerhouse since the 1930’s. Today, TROW manages about $770 billion in assets.
There have been two keys to its success. One, TROW’s active managers are actually worth their salt, thanks to their high “active share.” The company is headlined by several key fund managers who have guided their respective funds for decades, and in most instances have beaten their benchmarks over that time. Lower-than-average expense ratios haven’t hurt, either.
Secondly, TROW has been enormously successful at being an early-stage investor (read: before the IPO) in several of the world’s hottest startups. TROW funds owned companies such as Whole Foods (WFM) and Starbucks (SBUX) before they went public.
Its latest private placements have included Facebook (FB) and Twitter (TWTR). While TROW has had a few misses in the private placement category, these bets have proven quite successful for the asset managers’ funds.
All of this has resulted in impressive growth in TROW’s bottom Line. Analysts expect TROW to see 9% earnings growth over the next 5 years. As that happens, investors should be treated with a steadily-rising dividend — currently a 3% yield — and several special payouts. That dividend is heightened even more by the asset manager’s lack of debt.
Winning With Wall Street- Asset Managers To Buy #3: GAMCO Investors
For asset managers, it’s all about fees. Well, GAMCO Investors (GBL) has fees in spades. Run by legendary stock picker Mario Gabelli, GBL has some of the highest in the business. The average fund in GAMCO’s lineup costs $160 per $10,000 invested per year. That compares to just $120 for the average active mutual fund and $70 for passive index funds.
The reason for the higher fees is Super Mario himself.
Gabelli is probably the last of a dying breed of asset managers — deep value investors. Gabelli often takes bets on a concentrated portfolio of stocks and holds them for years. While this strategy doesn’t always beat the market, when it does, it’s insanely profitable. You just have to wait it out. Those investors who did have made a killing.
A client who had invested $10 million in GAMCO’s flagship fund back in 1978 would have nearly $2.2 billion as of this past March. The S&P 500 would have grown to only $645 million.
As for GBL stock, it’s down about 30% this year as investor’s have worried about the company’s future in the new low-cost world. Gabelli has called index ETFs “mindless investing.” However, the drop could be a great buying opportunity, especially at GBL’s current P/E of 14.
GBL still makes a bundle on its mutual funds — about $87 million last quarter. This, coupled with margins of around 34%, have helped GAMCO remain profitable in the wake of slight asset declines.
Ultimately, GBL is a cheap asset manager bet on the return of stock picking.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
