Jubak's Boomer Bets
05/05/2006 12:00 am EST
With his exposure on CNBC as well as on MSN Money, Jim Jubak has gained a very wide following among investors, as seen by his popularity at Money Shows. But it is not his exposure that deserves notice, but the consistent excellence of his insights. Here's a sample.
"In recent decades the federal government has given preferential tax treatment to things like IRAs and 401(k)s and a welter of other tax-advantaged vehicles. And that trend isn't played out by any means. The government now wants to use tax advantaged accounts to encourage savings. It's not like the asset management industry needs the government to throw more money its way- these companies are already riding a huge demographic trend, as about 80 million Baby Boomers are set to retire over the next two decades.
"All the evidence so far says that
investors who are spending down a retirement nest egg want more advice on
managing risk and maximizing return than accumulators. They're also more willing
to pay extra fees for products such as annuities and life cycle funds that help
manage risk. The retirement asset management industry estimates that up to 80%
of retiring boomers will want financial advice during these drawdown
"Select asset management companies will benefit from this trend, and one such company is SEI Investments (SEIC NASDAQ). What's better than one growth business? How about two? SEI Investments manages assets- about $150 billion as of the end of 2005 in its private-banking and money-management units. This business accounts for about 45% of the company's revenues. The rest comes from handling transactions for other asset managers, including registered investment advisors, pension plans, and institutional investors.
"Riding those two models for leveraging the growth in Baby Boomer retirement assets, SEI Investments grew revenue by 12% in 2005 and earnings per share by 15%. Profit margins look like they'll expand in 2006 as the company reaches the end of spending on the most recent stage of its international expansion. The stock trades at 19.4 times projected 2006 earnings per share.
"Wilmington Trust (WL NYSE) offers safety and growth. Not a bad combination. The managers at Wilmington Trust have demonstrated their ability to safely navigate their way through the interest-rate hikes. In 2005, many banks saw their net interest margin squeezed, as the Fed raised short rates (the cost to a bank of raising money) and long interest rates (what the bank can charge borrowers) stayed steady or even declined. But Wilmington was actually able to increase net interest margins which helped the company beat Wall Street earnings estimates for the fourth quarter of 2005 by six cents a share.
"The company also showed a 36% increase in net income from the fourth quarter of 2004. But the real growth story comes from the bank's asset management business for wealthy clients. Assets under management climbed to $40 billion in December 2005, and revenue from the wealth-advisory services unit has climbed at an 11% compounded annual rate since 1995. The stock recently traded at 16 times projected 2006 earnings per share.
"It sure doesn't hurt an asset manager when its asset management vehicles-mutual funds and the like- perform better. That been the case at AllianceBernstein Holding (AB NYSE) recently, as the company's funds continue to improve on problematic performance in 2001 and 2002. As a result of that improvement and the addition of new products, assets under management in the fourth quarter of 2005 rose 7%, to $579 billion, from the fourth quarter of 2004.
"Following the 2000 acquisition of independent research company Sanford Bernstein, AllianceBernstein has worked to build-out a global research platform that would allow the company to increase its revenue from overseas institutional investors. About $180 billion of its assets now come from foreign investors. But the fastest growing part of the business, which also came over with the 2000 acquisition, is in money management for individuals.
"The private client business in 2005 accounted for 13% of assets under management, 34% of fee revenue, and 24% of total revenue in the fourth quarter of 2005. Since the end of 2000, AllianceBernsteins's private client assets have grown by a compounded average rate of 15% a year. The stock recently traded for 19.3 times projected 2006 earnings per share."