One of my favorite money managers is Stephen Jarislowsky. He believes you can buy IPOs much cheaper by waiting a year or two after their public offering. If we look for companies that fit this description, small cap Artio Global Investors (NYSE:ART) certainly qualifies. Artio went public in September 2009 at $26 a share and 16 months later trades 45% lower. Although the company's suffering from outflows in assets under management, I'll look at some of the reasons why this presents real opportunity.
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Increased ETF Competition
Artio announced Q3 earnings in October that were 15% lower year-over-year with $1.4 billion in net outflows of assets under administration. This decline prompted Ticonderoga Securities to issue a "Sell" rating on the stock. Analyst Doug Sipkin reasons that Artio faces tremendous competitive pressures from exchange-traded funds (ETFs) and will likely continue to see outflows in its assets. Maybe so, but this doesn't justify a 45% drop in its stock price. Canadian mutual fund company AGF Management (TSX:C.AGF.B) has experienced fund outflows in recent years. Yet during this time, AGF's stock has risen an average 15.4% annually. AGF proves that it's possible to remain profitable despite a significant outflow of assets.
Third Quarter Earnings
While third quarter earnings declined 4%, nine-month non-GAAP adjusted earnings increased by 10% thanks to a 15% increase in investment management fee revenues. Although the third quarter wasn't perfect, analysts still expect Artio to earn $1.65 a share in 2011, which is a forward P/E of 8.8. The company's peers average 16.1 time's forward earnings or almost double. Should Artio rebound from a poor third and, likely, fourth quarter, its stock is definitely the cheapest in the group.
Artio Global Investors and Peers
|Artio Global Investors (NYSE:ART)||8.8|
|Franklin Resources (NYSE:BEN)||12.7|
|T. Rowe Price (Nasdaq:TROW)||21.1|
Detractors point to Artio's funds' uneven performance in recent years as the reason for an outflow of assets. I don't buy this rationale. It's true that for the year ended November 30, 2010, four of its nine funds were in the second quartile or worse, but it's also true that five were in the first quartile including its US Microcap Fund, which Lipper ranks eighth out of 794 funds. Since inception, all are either first or second quartile. That's a great record any way you look at it. (A clear rebalancing strategy is a critical component of portfolio management, particularly in tough economic times. Check out Portfolio Management Pays Off In A Tough Market.)
Investment management is a fiercely competitive business. There are going to be ebbs and flows in assets under management. Do I think what happened to AGF is going to happen to Artio? No. In fact, I think it's an ideal time to buy.
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