Publicly traded mutual fund firms have delivered stellar returns over the past two years, in many case far better than the performance of their own mutual fund portfolios, The New York Times reports.
Three companies that have done particularly well since March 2003 are Legg Mason, which has risen 58%, T. Rowe Price, up 44%, and BlackRock, up 49%. Matt Snowling, an analyst at Friedman, Billings, Ramsay who follows a basket of six mutual fund companies that include Legg and T. Rowe, said the six stocks rose 22% in 2005 and 8.9% in the first quarter of this year, which is far ahead of all of the major indices.
The strong returns are surprising to some industry watchers, particularly in light of the bear market of 2001 to 2003, the trading scandal that tainted the reputations of so many mutual fund companies and cost them expensive settlements, and a rash of new regulations.
But experts point to four main reasons for mutual fund companies' strength. First of all, the market, thankfully, rebounded, and with it, so did asset flows and returns. Second, mutual fund companies continue to enjoy some of the highest operating margins in the financial services industry, with many earning 30% to 35%. Third, mergers and acquisitions have once again heated up, boosting share values. Finally, investors with a long-term horizon believe mutual fund companies will continue to do well in the coming years as Baby Boomers begin to retire.
But before investors pour their money into mutual fund companies' stock, they should consider a few caveats, financial planners warn. Pouring money into an asset management firm could upset an investor's diversification. The S&P is also at a five-year high, meaning that many of these stocks could be overvalued. Further, investments in asset management firms are largely a gamble on the overall direction of the market; should it tank, it will inevitably pull down the share prices of publicly traded asset management firms.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.