With the millions of Baby Boomers getting ready to enter their golden years, turning those years of savings into a steady income stream is becoming a paramount issue. At the same time, younger workers are now just beginning to take the first steps towards retirement planning. The new attitude towards saving has pushed assets in mutual funds, exchange-traded funds (ETFs) and closed-end funds towards record highs. While the investment vehicles themselves promise steady long-term returns, investors may want to look at the firms that manage all of these assets for portfolio gains. After all, the people who made the most money from the gold rush, where those who provided the picks and shovels.
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Betting on the Asset Managers
While most investors will look towards mutual funds when it comes to putting money to work, they may want to look at who's managing that fund instead. While some of the biggest mutual fund and asset managers, like Vanguard and Fidelity, remain private firms, there are a handful of publicly traded mutual fund companies.
The main draw of investing in money management firms lies within their consistent cash flow generating business model. Anyone who has ever purchased a mutual fund or ETF should be familiar with that vehicle's expense ratio. Each year, fund managers earn their keep by taking a percentage of a fund's assets. If the fund manager is successful at generating returns and asset growth, the amount of money that they will see rises. At the same time, if returns are poor, the fund still makes a profit on the expense ratio. This also assists managers to generate returns in both good and bad years. In addition, the larger the firm, the better it is at capitalizing on economies of scale. More of those fees can be channeled directly into the company's bottom line. Overall, this business model makes the asset managers a very profitable subsector of the financial services industry.
While many investors have moved towards using low-fee index funds to construct their portfolios, asset managers have become global in scope. Higher internal savings rates and overall better economic growth projections make a variety of foreign markets an ideal place for the publicly traded asset managers to venture. For example, investors pulled more than $21 billion from actively managed large cap United States stock funds during the first quarter of 2012. At the same time, foreign inflows continue to be robust. This leaves plenty of opportunity for American fund companies.
SEE: ETFs Vs. Index Funds: Quantifying The Differences
Buying a fund Manager
Given the long-term prospects for the asset managers, investors may want the sector ago. For those looking for a broad play on the theme, they could use the SPDR S&P Capital Markets ETF (ARCA:KCE). The ETF follows 47 different asset managers, broker-dealers and investment advisors including Northern Trust (Nasdaq:NTRS) and State Street (NYSE:STT). The fund charges 0.35% in expenses and yields a market beating 2.45%. Overall, it can provide a get starting point. However, some of the best prospects may be in individual asset managers. Here are a few picks.
With $3.7 trillion worth of global assets under management, BlackRock (NYSE:BLK) is the largest fund manager on the planet and should get the nod from investors. The company recently reported robust earnings and continues to see record inflows into its successful iShares ETF line. The average analyst price target for shares is nearly $30 higher than the current price. Likewise, analysts are fairly bullish on Franklin Resources (NYSE:BEN) and T. Rowe Price (Nasdaq:TROW). Franklin, which is the operator of the successful Franklin-Templeton line of mutual funds, along with T. Rowe Price, continues to be a 401(k) plan leader.
Sometimes it takes a specialist to get the job done. Both U.S. Global (Nasdaq:GROW) and Cohen & Steers (NYSE:CNS) could be interesting plays in the sector. U.S. Global has seen big inflows into its natural resources and commodity funds as investors have flocked to those asset classes. Similarly, Cohen & Steers is benefiting from the rush into high yielding products. The firm is considered to be the real estate investment trust leader.
The Bottom Line
With saving and investing continuing to move up the priority ladder for many Americans, it stands to reason that the asset managers should continue to do well. For investors, it may make more sense to bet on the ones operating the funds rather than the funds themselves. The preceding picks, along with Legg Mason (NYSE:LM), make ideal selections to play the group.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.