Recent market volatility has scared mutual fund investors out of stock funds and into more diversified investments - opening the door for you to profit from a rebound in the top money manager stocks.
Anxious mutual fund investors pulled a net $21.4 billion from U.S. stock mutual funds in August after the Dow Jones Industrial Average had two of its top-10 worst days ever on Aug. 4 and Aug. 8, according to industry consultant Strategic Insight.
These recent single-day plunges erased billions in retirement holdings' value - and fund investors are tired of the quick losses.
"You can't keep having bombs, so to speak, go off," Andrew Goldberg, a market strategist at JPMorgan Funds, told Bloomberg. "If the second you walk outside another one goes off, you're going to stay inside for longer, and that's what's going on."
Now mutual fund investors are looking for more globally diversified funds and a broader range of asset classes, meaning companies offering those will be able to cash in on the changing fund-investing environment.
Not only that, these companies' share prices have hit new lows, meaning now's the time to get the top money manager stocks at a steep discount.
Investors Hunt for Safety
Historically investors steadily return to mutual funds after market sell-offs. In the year after the 2000 - 2002 bear market, when the Standard & Poor's 500 Index lost 48%, $130 billion flowed into U.S. equity funds, according to the Investment Company Institute (ICI).
Outflows since the 2008 financial crisis, however, have not reversed as quickly, meaning investors are more spooked than usual and evaluating alternatives as they return to the market.
"What we have seen this time is a much slower return to risk-taking," Franis Kinniry from Vanguard Group Inc. told Bloomberg. "There was significantly more wealth destruction this time around."
Instead of stock funds, returning investors are pouring money into passively traded index funds and exchange-traded funds (ETFs). ETFs for all asset classes saw $851.5 billion in deposits over the past 10 years.
Investors have also turned to bond funds, which have added $75 billion in deposits this year, and funds focused on foreign stocks, up $15 billion.
Global bond funds have also seen a pick up in investment.
"The big shift in the last few years is people want to diversify and maintain purchasing power," Franklin Resources Inc. (NYSE: BEN) Chief Executive Officer Gregory Johnson told Bloomberg. "That's really where global bonds have been such a perfect fit."
The stock fund outflows have beaten down fund company and money manager stocks - especially those heavily invested in U.S. stocks. The S&P 500 index of money managers and custody banks is down 15% since May 2010.
But not all money managers will suffer.
The Money Manager Stocks to Buy Now
Money managers that do best in this withdrawal-heavy environment are the ones with a more diversified asset mix. Three examples are:
BlackRock bought Barclays Global Investors, the investment unit of Barclay's PLC (NYSE ADR: BCS), in June 2009 to become the largest global asset manager. It now has $3.6 trillion assets under management.
A recent increase of money pouring into iShares, BlackRock's ETF provider, has helped the company offset mutual fund losses. The proportion of money flowing into U.S. ETFs fell from 26% at the start of 2010 to 16% in 2010's fourth quarter, but has since rebounded to 24% in 2011's second quarter.
BlackRock has also seen an increase in overseas ETF investing. United Kingdom inflows to iShares ETFs through the year ending Aug. 31 rose 71% from the year before.
BlackRock, a favorite pick of hedge fund manager John Paulson, has a dividend yield of 3.52%. At $149 a share it's currently trading near its 52-week low of $144, but analyst price targets are up to $210 - $230.
Invesco bought Morgan Stanley's (NYSE: MS) Van Kampen mutual funds last year for a bigger domestic base of funds, but is exploring global expansion efforts and alternative products. While the company's stock funds lost $2.6 billion last quarter, its fixed-income funds and alternative products gained $6.1 billion.
Invesco's exposure to international stocks helped boost client assets 17% last quarter and pushed revenue up 36% from a year earlier. The company's second-quarter profit rose 77% to $183 million from $40.8 million a year earlier.
Invesco has a dividend yield of 3.9% and a 31% payout ratio. Its stock hit a new 52-week low in August, but analysts expect its diversified asset mix to help it outperform other fund companies and boost share price.
JPMorgan Chase & Co. (NYSE: JPM) analysts just reiterated their "Overweight" rating for Invesco on Sept. 12.
Franklin Resources is the fifth U.S. mutual fund company with $747.2 billion assets under management as of July 31, 2011 - a 19% increase from July 2010.
Franklin has 89% of its assets outside domestic stocks, making it an attractive alternative to U.S. market volatility. Its global diversification is a key reason it's survived investors' frustration with stock funds.
Franklin's Templeton Global Bond Fund attracted $10.9 billion through June this year, more than any other U.S. mutual fund. The company's world bond funds accounted for 43% of long-term sales in 2010.
At $113 a share Franklin is trading well below the average analyst price target of $142. Its stock is up 3% this year, higher than any other money manager in the S&P 500.
"They tend to not make any mistakes," Jonathan Casteleyn, an analyst at Susquehanna Financial Group, told Bloomberg about Franklin's executives. "They say they pay back 60 to 80 percent of their net income either in the form of dividends or share buybacks. It's a cash cow."
News and Related Story Links:
- The Financial Times:
Asset managers forced into rethink
- Bloomberg/BusinessWeek:
Invesco Profit Rises; CEO Flanagan Pushes Europe Expansion