Mr. Weyeneth: I cover the asset management sector here at Sterne Agee. My coverage universe right now includes what I would consider to be the larger traditional asset managers. The names are Franklin Resources, BlackRock, Eaton Vance, Federated, Janus (JNS), Invesco, Legg Mason, T. Rowe Price (TROW) and Waddell & Reed.
TWST: You have "neutral" ratings on a quite a few of your stocks right now. What changes will you look for to upgrade some of those stocks?
Mr. Weyeneth: Right now I have three "buy" ratings and six "neutral" ratings on the stocks I cover. I'd say the recent pullback we have seen in both the market and the group gets me incrementally more positive. When you look at valuations on an absolute and relative basis, the group certainly looks more interesting, but I think the discounts are currently justified when you think about fundamentals. Obviously these companies' earnings are highly sensitive to the capital market. So with a more volatile and uncertain market outlook, it's difficult to get comfortable around where earnings might be, both near term and longer term. Also when I look at mutual fund flows for the industry - either on a weekly aggregate basis for the industry, which ICI publishes, or on a company-specific basis, which you can get from data providers, such as Strategic Insight's Simfund - the flows recently have been fairly weak, with poor equity flows and historic money market outflows. Historically, asset manager stocks outperform in times when mutual fund flows are robust and equity markets are strong - clearly not today's environment. It's anyone's guess as to when that turns around, although a general improvement in economic indicators, such as unemployment and consumer confidence, are clearly key indicators to keep an eye on. When you start to see stronger economic numbers and reduced market volatility, sector valuations still remain as attractive. I think that's when I would get more bullish on some of the "neutral"-rated names I cover.
Tickers included in this excerpt: BEN, BLK, EV, FII, IVZ, LM, WDR
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