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The big winners of Dow 11,000
When the market heats up, the stocks of mutual fund companies do, too. Here are the 5 asset managers best positioned to reap the rewards.
By Jim Jubak
What do you get when you put together expectations of the end to the Fed's interest-rate hikes and a close above 11,000 on the Dow industrials?
The ideal time to buy stocks of the companies that manage investors' money.
On Monday, the Dow Jones Industrial Average ($INDU, news, msgs) closed above 11,000 for the first time since June 7, 2001. That creates the kind of excitement that brings investors scrambling to buy mutual funds from the likes of T. Rowe Price Group (TROW, news, msgs) and Janus Capital Group (JNS, news, msgs).
Last week, the release of the minutes from the Federal Reserve's Open Market Committee, the body that sets short-term interest rates, convinced investors that one or two more interest-rate increases would be enough to put an end to its run of rate hikes. So far, its 13 consecutive 0.25 percentage point increases have taken short-term rates from 1% in June 2004 to 4.25% in December 2005. Short-term rates above 4% bring money flooding into money-market funds of the kind run by Federated Investors (FII, news, msgs).
The asset management business is pretty simple. More money coming in from investors -- and better stock and bond performance -- is good because asset managers collect fees that are largely based on the dollar-value of the accounts they manage. Money going out is bad since it cuts that revenue and forces managers to sell stocks and bonds when prices are falling in order to meet the demands of investors who ask for the return of their money.
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Since many costs are fixed for asset managers -- advertising and research cost what they cost whether $1 million or $1 billion is coming in the door -- higher inflows result in even bigger increases in profits.
So as you'd imagine, November 2005 was a much better month for the asset management business than November 2004. U.S. equity and money-market funds attracted $24 billion and $35 billion, respectively, of new assets, according to Simfund. That was up from inflows of $22 billion and $2 billion in October.
But it was a better time for some kinds of asset managers than others.
Follow the money
November kept the good news coming for money market funds. These asset pools have seen net inflows in six of the past seven months -- after facing net outflows for most of the last three years. Net inflows of $20 billion to date compare to a net outflow of $141 billion in 2004 through November.
And November also marked a startling turnaround for managers of funds specializing in U.S. growth stocks. After recording outflows month after month since April 2004, the flow into these asset pools finally turned positive in November.
The news wasn't as good for the managers of funds that specialized in U.S. fixed income investments, such as U.S. Treasurys. In fact, these funds saw a net outflow of $1 billion in November. That put an end to a string of seven consecutive months of net inflows, but bond funds still took in a net $36 billion of new money in the first 11 months of 2005. That's well ahead of the $1 billion in net inflows in first 11 months of 2004.
The key to taking advantage of the enthusiasm for Dow 11,000 and an end to Federal Reserve interest-rate hikes is to find the asset managers best positioned to get the strongest money flows.
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