Buy your fund manager

Investing in asset management companies

 
(Photo: Andy Kropa/Redux)
(Photo: Andy Kropa/Redux)

Don’t be fooled by all the RRSP materials your investment firm will soon be sending your way. While it’s nice to think that your adviser has your comfy retirement at heart, the saving season is really about bringing in more bucks. This year, instead of just handing over your dough, consider getting in on all that fund-inflow action. How? By buying an asset manager.

Fund companies may not be as popular an investment as banks and insurers, but it’s this financial sub-sector that should grow fastest in the coming months. Already, publicly traded asset managers have seen their stock prices soar. Toronto’s CI Financial, for instance, is up 45% over the past 12 months. New York’s AllianceBernstein has seen similar gains.

The reason has to do with the ongoing recovery of global markets. Asset managers’ fees grow as assets under management rise. As people begin investing again, and as more money moves from bonds to equities—the latter is a higher-margin product—these companies will see earnings rise, explains Brad Radin, lead manager on IA Clarington’s Global Opportunities Fund.

Radin is overweight the sector for another reason: these are cash cows with yields of at least 3%. Besides salaries and office space, there’s almost no overhead. Current demographics are also good for business, says Daniel Cheng, vice-president of Matco Financial. Now that they’re all over 50, the boomers want more financial advice and will be big investors over the next 10 years.

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When buying an asset manager, look for companies that have a diversified asset mix, says Cheng. Some companies only sell equities or bonds, while others are more focused on one region. Businesses that invest in all sectors, regions and asset classes will withstand market ups and downs better than niche investment houses.

Look at valuations, too. On a price-to-earnings basis, there are a number of American and British companies trading at around 15 times earnings, which is on the low end of the sector’s historical norm. Canadian firms are more expensive at around 20 times earnings.

But you needn’t be too picky. “The greatest thing about the money management industry is if you run it poorly, you still make lots of money,” says Dennis Mitchell, Sentry Investment’s chief investment officer. “Of course, that’s also the worst thing about it too.”

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