Growing Assets in Good Markets and Bad

08/11/2010 10:57 am EST


Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd, associate editor of Personal Finance, says asset managers and firms that help them have been growing steadily, and he names two favorites.

Although the financial sector is once again outperforming the broader Standard & Poor’s
500 index, shares of many asset managers and related service providers trade at price-to-earnings ratios that are well below their historical averages.

Founded in 1937, T. Rowe Price (Nasdaq: TROW) is one of America’s oldest and most respected asset managers. The firm offers a full suite of mutual funds, as well as separate account management and retirement plan services. A reputation for low costs has enabled the firm to grow its assets under management (AUM) to more than $390 billion.

A high percentage of its AUM are in retirement, providing a degree of stickiness that limits outflows. Despite a $27.9 billion decline in total AUM—most of which stemmed [from] market depreciation, not fund outflows—earnings per share reached 61 cents in the second quarter, up from 59 cents in the first quarter and 39 cents a year ago.

The asset manager should continue to grow earnings as it expands its global footprint. TROW purchased a 26% interest in India-based UTI Asset Management earlier this year and launched four new equity funds aimed at Taiwanese investors.

Building its presence in key emerging markets is a high priority: Demand for investment products tends to increase alongside household incomes.

The domestic outlook is equally rosy. TROW’s target-date retirement products remain extremely popular, attracting net cash inflows of $1.6 billion in the second quarter. And [it] continues to expand its domestic investment advisory business.

With no debt on its balance sheet and $1.4 billion in cash and investment holdings, T. Rowe Price self-finances its growth and has a history of shareholder-friendly moves. The company has already repurchased 3.6 million shares of its common stock in 2010.

Trading at a valuation that doesn’t account for future growth, T. Rowe Price rates a buy up to $55. (It closed above $49 Tuesday—Editor.)

State Street (NYSE: STT), one of the world’s largest trust banks, straddles the divide between investment servicing and investment management.

Its investment servicing division holds more than $15 trillion in assets under custody and provides institutional investors with accounting, daily pricing, custodial services, and record keeping. State Street has few real competitors, superior economies of scale, and the ability to run the back-office operations of any asset manager.

State Street’s investment management operations currently have more than $1.5 trillion in assets under management and provide investment research. [That includes] almost $200 billion overseen by its State Street Global Advisors division, which runs the extremely popular SPDR funds.

Although State Street suffered a sizeable loss during the financial crisis and market meltdown, the firm managed to grow AUC and AUM 20% over the past five years. The company also has grown its international business, particularly in Europe and Asia, where ETFs are extremely popular.

Despite [its] size, State Street has plenty of growth opportunities. State Street is a bargain up to $45. (It closed above $39 Tuesday—Editor.)

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