Financial markets have been on a tear for much of this year, and even a pause for breath in the wake of Federal Reserve Chairman Ben Bernanke’s comments about ‘tapering off’ the Fed’s support for the fixed income market didn’t put much of a dent in investors’ confidence, it seems. True, bond yields ended that bumpy period at higher levels, but inflows to mutual funds and exchange-traded products remained remarkably robust. As of the end of July, equity mutual funds had reported 30 straight weeks of net inflows, according to Lipper data, and equity-linked exchange-traded funds continue to pull in billions of dollars a week.
That’s good news for asset management companies like the giant BlackRock Inc. (BLK) and the turnaround candidate, Legg Mason Inc. (LM), both of which recently posted better-than-expected earnings results for their most recent quarters. Either represents an appealing investment idea for an investor looking for a way to play the bull market and who is wary about simply taking a long position in the S&P 500 index itself.
Owning a stake in an asset management company offers an indirect way to participate in the market’s gains without the kind of volatility that goes along with the broad market indexes that can be buffeted by bits of unexpected news. An asset management company, in contrast, is a play on the long-term trend of growing investor interest in the bull market, and the better the caliber of its own investment offerings, the more likely it is to grab market share during such a bull market and outperform as a result.
BlackRock is the more obvious way to play this trend. Like all companies in the sector, it suffered during the bear market, losing just over 10% of its assets under management during the third quarter of 2008, at the height of the financial crisis. Since then, however, it has regained ground, both in terms of its business and its share price.
Most intriguing of all, a little market research shows, BlackRock is a big player in the ETF market through iShares. As the market has recovered, one hallmark has been a growing interest in exchange-traded products, which offer low-cost and ultra-liquid ways to play even the narrowest market theme. To the extent that one of those ETFs loses assets when a particular market hits the skids, the odds are that investors, while selling, are quite likely to shift into another ETF.
Moreover, BlackRock is teaming up with Fidelity to gain a wider audience for the iShares products, even as it continues to roll out not just the obvious ETFs (another play on gold or clean energy, anyone?) but also creative new twists that may well prove to meet investor needs. For instance, the iShares minimum volatility ETFs are actively managed to give investors access to most of the upside in a given index while seeking to minimize volatility.
True, the ETF business saw outflows of $963 million in the second quarter, but that is a drop in the bucket compared to the $25.6 billion of inflows recorded during the first quarter and the assets under management in the iShares business of $774.4 billion. According to at least one recent report, BlackRock’s mutual funds may not be as appealing as those of some of their rivals, but overall, the company’s assets under management hit $3.857 trillion by the end of the quarter, 8% higher than year-earlier levels, while net income soared 32%.
Still, some investors may feel that much of BlackRock’s success already is priced into its stock, now trading at nearly 20 times trailing earnings, and that its 2.34% dividend yield, while appealing, isn’t enough to offset that. Those willing to take on more of a business risk might well take a glance at the much smaller Baltimore-based rival, Legg Mason Inc. True, its assets under management of $644.5 billion are up only 2% over year-ago levels, but it is in the midst of a turnaround, seeing long-term inflows increase for the first time since the beginning of the financial crisis in 2007.
Part of that may be due to veteran fund manager Bill Miller, famous for beating the S&P 500 for a record 15 years in a row. Miller is now on top of the heap again, this time with the Legg Mason Capital Opportunity Fund, which finished the first six months of 2013 with a 31% gain and currently is up 41.6%, more than double the gains of the S&P 500. If you’re not comfortable owning the stocks that Miller likes – they include Groupon (GRPN) and Apple (AAPL) – then owning Legg Mason is an option. The company recently reported a first-quarter profit of 38 cents a share, compared to a loss of 7 cents a share in the year-ago quarter. If you like the idea of investing in a smaller firm that relies on the stock-picking prowess of its managers to attract assets and not just on the marketing savvy of its ETF team, this now looks like a much more appealing option than it did only a few months ago.
In either case, for newly-minted bulls with a streak of bear lingering in their makeup, investing in these or other asset management firms is a way to bet on the bull market without having to extend their horns too far into uncharted territory.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.
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