10 Investors' Stocks Beating the Market

3/23/2012 @ 7:57AM
Article from Forbes

The financial-services sector, and asset managers in particular, has come roaring back this year amid signs of economic growth and an apparent resolution of the sovereign debt crisis in Europe.

The positive outlook from investors has also renewed confidence in asset management firms, which are benefiting from higher trading volume and money inflows to their funds this year, even as they battle to stanch the run-off of the past few years to inexpensive, passively managed index funds or exchange traded funds after several years of funds’ underperformance.

As a result, the leading asset management companies’ stocks are posting double-digit gains in 2012.

Shares of companies in the asset management company category, as tracked by Morningstar, are up an average of 19% this year, versus the benchmark S&P 500′s 12% gain. Two of the biggest fund management firms, Vanguard Group and Fidelity Investments, aren’t publicly traded.

On Friday, S&P Capital IQ upgraded the asset management and custody banks sector to “positive” from “neutral” because “so far this year, fund flows have done a turnaround with new investments coming into long-term funds.

“We observe a shift in investor sentiment toward the positive as many 2011 fears have been put to rest or at least tempered.”

The Investment Company Institute reported investor inflows to bond and equity funds of $35.6 billion in January, the first positive month of inflows after outflows over the last seven months of 2011.

That trend picked up speed in the following six-week period with inflows of $59.6 billion through the first week of March.

But bond funds are the biggest beneficiaries. For example, investors pulled $126 million out of mutual funds that buy domestic and foreign stocks during the the first week of March, while $10.7 billion flowed into mutual funds that invest in bonds, ICI reported.

But, in the long term, the outlook for the industry should be bright as baby boomers continue to add to their retirement nest eggs. S&P says that “over the next 10 years, there should be a significant increase in retirement investments.”

Most big, national banks also provide money management and advisory services, but many sold off their mutual fund units after the financial crisis. Only a few, such as Bank of America (BAC) and its Merrill Lynch money management unit, and investment bank JPMorgan Chase (JPM), still rely on asset management as growth drivers, especially JPMorgan.

Bank of America’s global wealth management unit brought in more than $15 billion in net new assets in 2011 and generated net income of $1.6 billion. Bank of America shares have rocketed 66% this year.

JPMorgan, now one of the 10 largest U.S. stock and bond fund managers, saw huge growth last year of almost $50 billion in assets under management. Its shares are up 35% this year.

Here, in inverse order of returns this year, are 10 asset management firms that are benefiting from increased investor activity:

10. T.Rowe Price (TROW)

Company profile: T. Rowe Price, with a market value of $17 billion, provides asset-management services for individual and institutional investors.

Investor takeaway: Its shares are up 14% this year and have a three-year, average annual return of 37%. Analysts give its shares four “buy” ratings, three “buy/holds,” 16 “holds,” and one “sell,” according to a survey of analysts by S&P. But S&P upgraded it to “strong buy” from “hold,” on March 6 with a price target of $73, which is a 16% premium to its current price. Assets under management grew by 2% last year. S&P says “We think good relative performance of (its) mutual funds will continue to drive asset growth. For the three years through 2011 as 76% of the firm’s funds outperformed their comparable Lipper averages.”

9. State Street (STT)

Company profile: State Street, with a market value of $22 billion, is one of the largest trust banks worldwide, combining banking, asset servicing, and asset-management operations. At year end, State Street had nearly $1.9 trillion in assets under management, and nearly $22 trillion in assets under custody.

Investor takeaway: Its shares are up 14% this year and have a three-year, average annual return of 27%. Analysts give its shares seven “buy” ratings, nine “buy/holds,” six “holds,” and one “sell,” according to a survey of analysts by S&P. For fiscal year 2012, analysts estimate that it will earn $3.90 per share, growing by 15% to $4.48 per share in 2013. S&P reiterated its “buy” rating on March 14. It just got a clean bill health in the Federal Reserve’s stress tests and subsequently said it is raising it dividend.

8. BlackRock (BLK)

Company profile: BlackRock, with a market value of $37 billion, is the world’s largest asset manager, with more than $3.5 trillion in assets under management.

Investor takeaway: Its shares are up 16% this year and have a three-year, average annual return of 27%. Analysts give its shares seven “buy” ratings, five “buy/holds,” and nine “holds,” according to a survey of analysts by S&P. For fiscal year 2012, analysts estimate that it will earn $13.08 per share, growing by 14% to $14.91 per share in 2013.

7. AllianceBernstein Holding (AB)

Company profile: AllianceBernstein, with a market value of $1.6 billion, offers investment management services to institutional, retail and private clients, through its mutual funds, hedge funds, and separately managed accounts. At the end of January it had $421 billion in assets under management.

Investor takeaway: Its shares are up 16% this year and have a three-year, average annual return of 13%. Analysts give its shares six “holds,” two “weak holds,” and three “sells,” according to a survey of analysts by S&P. It’s expected to earn $1.03 this year, growing to $1.17 in 2013. S&P has its shares rated “strong sell” because of asset redemptions and outflows, particularly from institutional investors “as a result of a relatively poor investment track record since 2008, particularly in equities.”

6. Legg Mason (LM )

Company profile: Legg Mason, with a market value of $4.1 billion, provides investment management services for institutional and individual investors. It had $627 billion in managed assets at the end of 2011.

Investor takeaway: Its shares are up 22% this year and have a three-year, average annual return of 27%. Analysts give its shares two “buy” ratings, two “buy/holds,” 12 “holds,” two “weak holds” and one “sell,” according to a survey of analysts by S&P. For fiscal 2012, analysts estimate that it will

earn $1.49 per share, growing by 34% to $1.99 per share in 2013.

5. Eaton Vance (EV)

Company profile: Eaton Vance, with a market value of $3.4 billion, Eaton Vance provides asset management and investment advisory services to institutional and individual investors and specializes in tax-managed equity and fixed-income investments. It is also an issuer of closed-end funds. It had $188 billion in assets under management late last year.

Investor takeaway: Its shares are up 23% this year and have a three-year, average annual return of 17%. Analysts give its shares one “buy” rating, 10 “holds,” two “weak holds,” and one “sell,” according to a survey of analysts by S&P. For fiscal year 2012, analysts estimate it will earn $1.89 per share and that will grow by 12% to $2.12 per share in 2013.

4. Franklin Resources (BEN)

Company profile: Franklin, with a market value of $27 billion, provides investment services for individual and institutional investors. With $727 billion in assets under management, it’s one of the world’s largest asset managers. It’s expected to earn $8.77 per share this year.

Investor takeaway: Its shares are up 31% this year and have a three-year, average annual return of 40%. Analysts give its shares five “buy” ratings, five “buy/holds,” 11 “holds,” and one “weak hold,” according to a survey of analysts by S&P. S&P has it rated “buy” with a $128 price target, a 6% premium to the current price.

3. Invesco (IVZ)

Company profile: Invesco, with a market value of $12 billion, provides investment management services for individual and institutional investors under the Invesco, Van Kampen, Trimark, Perpetual, Atlantic Trust, PowerShares, and W.L. Ross brand names. It more than $625 billion in assets under management, about one-third from outside the U.S.

Investor takeaway: Its shares are up 32% this year and have a three-year, average annual return of 31%. Analysts give its shares six “buy” ratings, 11″buy/holds,” and three “holds,” according to a survey of analysts by S&P.

2. Federated Investors (FII)

Company profile: Federated, with a market value of $2.3 billion, is a provider of asset management services for institutional and individual investors.

Investor takeaway: Its shares are up 47% this year and have a three-year, average annual return of 9%. Analysts give its shares nine “holds,” two “weak hold,” and four “sells,” according to a survey of analysts by S&P. As a big manager of money market funds, with slightly more than $285 billion in such assets at the end of 2011, historically low interest rates have made it difficult for Federated to maintain positive yields on these funds and industry-wide, investors have also moved to higher-yielding assets elsewhere.

1. Janus Capital (JNS)

Company profile: Janus Capital, with a market value of $1.8 billion, is a provider of investment management services to individual and institutional investors.

Investor takeaway: Its shares are up 49% this year and have a three-year, average annual return of 22%. Analysts give its shares three “buy” ratings, two “buy/holds,” 11 “holds,” two “weak holds,” and one “sell,” according to a survey of analysts by S&P.

S&P, which has the stock rated “hold,” said “we believe that shareholders will benefit from holding Janus over the long term, we think the company will face near-term challenges from the relatively weak performance of many of its equity mutual funds, which has prompted many investors to pull their funds and re-deploy them elsewhere.”

–Written by Frank Byrt for The Street

Article from Forbes

AIJ Beckoned Japanese Pensions With 50-Year-Old Return Targets

Bloomberg News

By Tomoko Yamazaki and Komaki Ito on March 21, 2012

Article from Bloomberg Business Week

Atsushi Kanbe, who manages a Japanese pension fund for wholesalers of products from vegetables to pottery to household goods, said he turned to AIJ Investment Advisors Co. to help increase gains to pay retirement benefits.

“Through word of mouth, we heard that fellow pensions had invested with AIJ that offered high returns,” Kanbe told a parliamentary committee on March 14. “We wanted to make sure we never became one of the pensions that needed special government oversight for being underfunded.”

More than half of Japanese corporate retirement funds give workers predetermined benefits that don’t change when investments fall, leaving companies to make up the difference. Most of these use the same 5.5 percent return target established about 50 years ago when Japan introduced employee pensions to match returns of the national pension plan, according to Kazuhiro Sugaya, a senior researcher at the Research Institute for Policies on Pension & Aging in Tokyo.

Kanbe’s Pension Fund of Japan Wholesalers Complex is one of dozens of small to mid-sized Japanese retirement plans with limited investment knowledge that may have lost money with AIJ after struggling for years to close funding gaps created by low bond yields and two decades of slumping stocks. Tokyo-based AIJ was suspended for a month on Feb. 24 by Japan’s financial regulator after it couldn’t account for all of the 185.3 billion yen ($2.2 billion) it managed for clients as of March 2011.

Pension Legacy

“AIJ’s incident highlights Japan’s pension industry legacy of trying to meet a return that was set decades ago when the economy and market were booming,” Sugaya said. “AIJ’s clients may have been lured to riskier investments to achieve the returns. In today’s Japanese market, you just can’t find investments that would yield the 5.5 percent return many need to meet to keep them alive.”

AIJ’s AIM Millennium fund had annualized returns of more than 14 percent and returned 241 percent since it started in May 2002, according to an October 2011 newsletter to investors. The firm hasn’t been accused of wrongdoing. Phone calls to AIJ’s main office were answered by an automatic recording which didn’t allow messages to be recorded.

Funding Shortage

More than 440 pension plans out of 595 under Japan’s employee pension fund system had a combined 1.55 trillion yen shortfall between assets and liabilities in fiscal 2010, according to the Ministry of Health, Labour and Welfare, which oversees the pension industry. That was a 40 percent increase from the previous year.

Japan has the world’s second-biggest pension market, with assets of $3.47 trillion, after the U.S., which has $15.27 trillion, according to Towers Watson & Co.’s 2011 Global Pension Asset Study. Of the Japanese total, about 80 trillion yen is in corporate pensions, according to data from the health ministry.

The health ministry has set up a panel of industry experts to review how corporate pensions invest and the practice of allowing former bureaucrats to oversee their management, known as “amakudari,” which means “descent from heaven.” The committee plans to come up with a set of new guidelines in June.

Need for Alternatives

“There are expectations that the government will strengthen oversight on alternative investments as a whole,” said Yuki Arai, a former lawyer at Tokyo Eiwa Law Office, who now co-heads Book Field Capital Co., a Tokyo-based investment firm that has its own hedge fund. “But given the low interest rates condition globally, there is no change in the fact that pensions do need alternative investments.”

The Government Pension Investment Fund, the nation’s public pension fund, is the biggest in the world with 108 trillion yen in assets. The fund, with the majority of investments in domestic bonds, had a 0.58 percent return in the three months ended Dec. 31. It has been selling bonds to cover payments as the first of Japan’s baby boomers are set to turn 65 in 2012, becoming eligible for pension.

Japan workers take part in a compulsory national pension plan, similar to the Social Security in the U.S. The Japanese system also allows corporations and industry associations to operate pension funds that supplement the national program.

5.5% Return

Eighty-seven percent of corporate pensions under the employees pension fund system targeted a 5.5 percent annual return, health ministry data shows, even as interest rates have been stuck close to zero for decades and the benchmark Nikkei 225 Stock Average is about a quarter of its peak in 1989 in the world’s fastest aging society.

The Pension Fund Association, which manages about 11 trillion yen of retirement assets for company workers, lost 0.52 percent on its investments in fiscal 2010. Its average return over the past 15 years has been 2.65 percent after it was allowed to diversify assets in fiscal 1996, according to its website.

Twelve of the 84 pensions that invested with AIJ were under government supervision because they had funding deficits, according to the health ministry. Of the 582 retirement funds under the employee pension fund system, 81 were under supervision as of Dec. 1, according to the ministry.

Hunting for Returns

This is what Kanbe’s fund sought to avoid.

The pension that represents cooperatives of wholesalers of a wide range of products nationwide first invested 200 million yen with AIJ in fiscal 2005, and gradually increased its investments to about 2.7 billion yen, said Kanbe, who was asked to speak in front of the lower house financial committee to present the fund’s involvement with the Tokyo-based asset manager. The pension had 5.6 percent of its assets with AIJ as of March 2011, according to the health ministry data. Kanbe declined to comment beyond his testimony during the Diet session.

Kanagawa Prefecture Printing Industry Association, Fukuoka Prefecture LP Gas and Koshinetstu Printers Association had more than 30 percent of their assets with AIJ, health ministry data showed. They pool contributions from workers at different companies in the same industry or by region.

Kanagawa Prefecture’s printers invested 57 percent of their assets, or 9.1 billion yen, in AIJ, the most by percentage, according to the data. Calls to the pension were only answered by an answering machine that didn’t take any messages.

Profits Versus Common Sense

“In the case of AIJ, underfunded Japanese pension funds seemed to have placed profits ahead of common sense,” said Jason Scharfman, managing partner of Corgentum Consulting LLC in New Jersey, which provides due diligence service to the hedge- fund industry. “The job of pension fund managers is to exercise due diligence and protect assets, not simply chase high returns.”

Pension funds that invested with AIJ have yet to find out how they are going to resolve their underfunding until they know exactly where the money actually has gone, said an adviser to a pension representing commodity industry workers in Tokyo, asking not to be identified because the investment process is confidential.

In the wake of the AIJ scandal, talks that taxpayer money should be used to help cover the underfunding has risen.

“The potential losses are different for each pension. The most important thing is how much money will be able to be collected with the most minimum loss possible because it’s a fact that 200 billion yen has been invested,” Kiyoshi Murase, executive managing director of the government-backed Pension Fund Association, said in the Diet session.

Favoritism Rankings

He added that each pension should be responsible for covering the losses and underfunding as long as their investments were not sizeable, while the question of whether other sources of funds will be needed to save them should be hashed out by lawmakers in political debate.

Pensions ranked AIJ, which marketed a hedge-fund strategy that offered steady returns, first in a 2008 survey in an industry publication owned by Rating & Investment Information Inc. in Tokyo. The ranking was based on responses from pensions and not R&I recommendations to investors, said Fujio Nakatsuka, an R&I spokesman.

“It is important to make it clear that the rankings are merely based on favoritism by the pensions, rather than the actual recommendation of a fund by a rating company,” said Kazuaki Sakura, the adviser to the retirement fund of Hitachi Kokusai Electric Inc. (6756), a unit of Japan’s second-largest manufacturer. The retirement fund didn’t invest in AIJ.

5:3:3:2 Rule

Japan used to advise pensions to allocate more than 50 percent of their portfolios to stable assets such as domestic bonds, less than 30 percent to equities and overseas assets, and less than 20 percent to real estate in what was known as the 5:3:3:2 rule.

That restriction was abolished in 1997, allowing the funds to set their own allocation targets. Retirement plans began investing in alternative assets, including hedge funds, to compensate for a lack of returns on traditional assets such as bonds and equities.

Today, the majority of Japanese pensions invest in alternative assets through major money managers affiliated with both local and foreign large financial institutions, said Hidenori Suzuki, the head of the strategic advisory group at JPMorgan Asset Management (Japan) Ltd. in Tokyo.

Typically, about 70 percent of larger corporate pensions would use consultants, with expertise in conducting due diligence and introducing investments, Suzuki said. The number would drop for smaller pensions, Suzuki said, without providing a figure.

‘Proper Gatekeeper’

“Trust banks and major investment companies would be the major players in introducing alternative assets to pensions,” Suzuki said. “It seems as though there were pensions that didn’t use consultants among those that invested with AIJ.”

In the wake of AIJ, the government is considering placing people with experience in financial products with pension plans after criticism it sent former bureaucrats who may not have had proper skills to conduct due diligence. Retirement plans that had former bureaucrats overseeing their management totaled 399 out of 614 as of May 2009, health ministry data shows.

A former employee of the Social Insurance Agency recommended AIJ’s investments to pension clients, setting up his own consulting firm, according to reports by Kyodo News, which didn’t identify the employee.

“Unless you have a proper gatekeeper within the pensions, it’s only natural that they don’t know what to invest in, especially when it comes to non-traditional alternatives investments such as hedge funds,” said Goro Ohwada, president and chief executive officer of Aino Investment Corp., a Japanese hedge fund. “Smaller multiemployer pensions don’t have the capacity or expertise that bigger corporate pensions may have.”

To contact the reporters on this story: Tomoko Yamazaki in Singapore at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

Article from Bloomberg Business Week