Ask most investors what financial industry stocks they own and they’ll tell you banks and insurance companies. While there are a lot of good reason to hold these businesses, by just focusing on these two biggest sub-sectors they’re missing out on what’s perhaps the best financial bet today: asset management stocks.
These companies aren’t nearly as capital intensive as other operations in and out of the sector. Essentially, they spend their client’s money in the market and take a percentage of all that dough. If the market rises and their assets under management grow, they make more.
There are a lot of asset managers to choose from, but one company that a number of analysts and fund managers fancy is Schroders PLC (LON: SDR). This London, U.K.-based international asset manager sells investments to retail investors and it also has a private banking group that deals with the wealthy.
Brad Radin, CEO and chief investment officer at Radin Capital Partners, likes this business because it’s a global firm, he says. Companies with larger client bases are better than ones that are focused on people in a specific country.
He compares Schroders with Toronto’s CI Financial. The latter company has a near $10 billion market cap with $80 billion in assets under management. The former has a similar market cap, but has $350 billion of assets under management. “So the asset base is four or five times what CI Financial’s is, but the companies are basically the same price,” he says. “We find a lot better value here.”
Only 37% of Schroders assets are based in the U.K., says Radin, while 30% is in Asia Pacific, 23% in the rest of Europe and 30% in the U.S. “They have a very global platform,” he explains. That diversification is crucial. So is their focus on global investments. Companies that only sell fixed-income or, say, Canadian funds, will only be able to capture a certain segment of the market. A company like Schroders, which sells everything, can appeal to all investors.
David McCann, an analyst with Numis Securities, expects to see “reasonable growth” from the company in the years ahead. In an August 12 report, he wrote that earnings per share should grow by 14% per year between fiscal year 2012 and 2015. It also has “the most” diversified revenue base and the strongest balance sheet in the sector, he writes.
As people around the world invest more, and especially Europeans who’ve been hit hard by the recession, European-based asset managers in general should see revenues rise. Chris Turner, a Goldman Sachs analyst, thinks the company’s earnings per share could increase by 34% between now and the end of fiscal year 2015.
Schroders is trading 16.3 times 2014 earnings and 14.6 times 2015 earnings, which is slightly higher than its peers, but as more money moves from bonds into equities — which is a higher margin business — they’ll certainly see good growth. The stock is currently selling for about $2,590 (yes, it is pricy on a dollar basis), but a number of analysts expect it to hit $2,700 or higher over the next 12 months.
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