Our Top Picks in the Asset Management Industry

Well-diversified asset managers are attracting more inflows in the current environment

Greggory Warren, CFA 29 June, 2011 | 5:27PM
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Diversified Asset Managers Still Hold the Strongest Hand
With the uncertainty that still exists in the markets (and the economy), and investors' overall penchant for risk aversion, we think the more diversified asset managers in our coverage universe remain the best positioned to capitalise on the current environment. That said, we continue to believe it pays to be selective when looking at firms in this category, such as BlackRock, Franklin Resources, Invesco, Legg Mason, and AllianceBernstein.

Legg Mason (LM) (See Our Premium Stock Analysis)
Of these five names, we continue to have concerns about Legg Mason, which has had more trouble than most maintaining its assets under management (AUM). The firm's problems started well in advance of the bear market, as poor relative investment performance at its Western Asset Management division, which accounts for two thirds of Legg Mason's managed assets and is the main source of its fixed-income AUM, started a flood of outflows that has yet to reverse itself. In an environment where record levels of investor capital have flowed into bonds, Legg Mason has been unable to provide fixed-income products that would allow it to successfully attract and retain investors. And lacking the scale in equities it has in fixed income, the firm is also unlikely to garner enough inflows from its stock offerings to cover losses from its bond funds once investor sentiment does start to shift from fixed income to equities.

AllianceBernstein (AB) (See Our Premium St0ck Analysis)
AllianceBernstein is another one of our well-diversified asset managers that has struggled with outflows during much of the last two years. Much like Legg Mason, the firm has seen a significant level of outflows from its institutional client base, with the main difference being that AllianceBernstein's equity offerings have taken the hit. While relative fund performance has been improving, it is still poor during the last three- and five-year time frames, which are important benchmarks for most institutional investors. Since the equity markets bottomed in March 2009, AllianceBernstein has seen close to $140 billion in outflows from its equity operations, with most of the redemptions driven by institutional investors. Lacking the level of equity performance it needs to not only attract new investors but hold on to those it already has, AllianceBernstein has had to rely on market appreciation (which can be volatile) and an expansion of its fixed-income business (which generates lower fees than its equity operations) to maintain its AUM.

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Greggory Warren, CFA  Greggory Warren, CFA, is a senior stock analyst with Morningstar.