As Money Flows in, Asset Managers are Worth a Look

Money, money, money, mmmooonneeyy. MONEY!

No, I’m not singing the theme song to the Apprentice TV show, or the 1973 soul/funk song from The O’Jays it came from. I’m talking about the driving force of the incredibly powerful market advance we’ve seen so far in 2017 and late 2016.

Just consider the following …

» Exchange Traded Funds (ETFs) took in $46 billion in net new money last month, according to ETF.com. That brought year-to-date net flows to around $87 billion — making this the best start to any year ever for the ETF industry.

» If current trends persist, full-year ETF inflows could total $500 billion. That would be up 20% from the roughly $2.5 trillion currently invested in U.S. ETFs.

» The Investment Company Institute uses a different methodology that includes data on both ETFs and traditional mutual funds. It estimated that a net $78.5 billion poured into equity, bond, and commodity funds through late-February. That followed inflows of $52.1 billion in January — making these the best combined flows we’ve seen since late 2014.

Some pundits call it performance chasing, and that it will inevitably end in tears. I personally believe this rally is evidence of a “Great Reversal” – where money that’s been hiding in bonds for the better part of the last decade finally gets flushed out into other assets.

But one thing is clear: The more money that flows into the asset markets (particularly stocks), the more money asset managers stand to make. That’s because they generate profits from fees that are based, at least in part, on the volume of their Assets Under Management (AUM).

So which stocks in this business are worth a look? I started by corralling all the financial stocks in our Weiss Ratings universe. Then my team and I filtered out diversified financial firms that don’t specialize in asset management. We also eliminated any companies with less than 50,000 shares in average daily trading volume, and market capitalizations of less than $50 million.

That left me with a list of around 60 prospects. Right off the bat, I saw that Business Development Companies (BDCs) took many of the top spots. You might recall that I wrote about these lenders/asset managers in January, and how they offer a great combination of generous dividend yields and capital appreciation potential.

Since we’ve already covered that ground, I eliminated BDCs as the next step in the sorting process. Then I produced a “Top 10” list of pure asset managers, ranked from highest-to-lowest Weiss Rating. Here it is

You’ll see that I included a column showing the dividend yields for all 10 stocks. I also included their three-month total returns, since that captures the lion’s share of the post-election time period.

BlackRock Inc. (BLK, Rated “B”) took the top spot. The company led by CEO Larry Fink manages more than $5.1 trillion in assets, making it the industry’s 800-pound-gorilla. Next up was Boston-based Eaton Vance (EV, Rated “B-”). The company had around $364 billion in AUM as of January – up 20% from a year earlier.

Noah Holdings Ltd. (NOAH, Rated “C+”) is a lesser-known Chinese asset and wealth management firm with AUM of $17.4 billion at year-end 2016. OM Asset Management (OMAM, Rated “C+”) is a London-based firm with several boutique money management affiliates under its corporate umbrella, and total AUM of $240 billion.

Performance across the group ranged from negative-11.7% for the lowest-ranked stock on my list, Compass Diversified Holdings LLC (CODI, Rated “C”), to positive-22.3% for PennantPark Investment Corp. (PNNT, Rated “C+”). On average, though, returns were in the mid-single-digit range.

But those returns have been very strong over the past year: 42.4% on average for the 10 stocks listed. If we continue to see money pour into the asset markets, these are the kinds of names that should prosper. So consider doing additional research to see if one or more of them makes sense for your portfolio.

Until next time,

Mike