5 stocks for the coming retirement boom - Jubak's Journal

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Posted 4/12/2006

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Jubak's Journal
5 stocks for the coming retirement boom

80 million Baby Boomers will retire over the next two decades. As they scramble to save, these financial companies will thrive.

By Jim Jubak

Now that you've filed your tax return (You have, haven't you?), it's time to take a step back and see what stocks that good ol' 1040 form is telling you to buy.

Think about what you and your accountant have been up to getting ready to file your tax return. You've been managing your money, more or less aggressively and more or less successfully, by shifting it, where you could, from activities that produced a big tax bill to activities that resulted in lower taxes. In recent decades the federal government has actually encouraged this kind of asset management by giving preferential tax treatment to things like IRAs and 401(k)s and a welter of other tax-advantaged vehicles. And that trend isn't played out by any means. The government now wants to use tax advantaged accounts to encourage savings and to discourage excessive spending on healthcare.

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So where is the tax form you just filled out telling you is a good place to invest some money? In the shares of the asset management companies that collect fees for handling the money that the government encourages all of us to put into Roths and IRAs.

It's not like the asset management industry needs the government to throw more money its way -- these companies are already riding a huge demographic trend. About 80 million Baby Boomers are set to retire over the next two decades. That now puts many of them in the prime years, 55-64, for savings -- that time when pay is high and obligations such as paying for a college education ended (well, for some Boomers, anyway) -- when the amount of money socked away for retirement soars.

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And it's not just how much we're putting away for retirement, but also where we're putting it. The retirement asset market is seeing a huge shift away from traditional pensions managed by traditional pension managers to plans such as IRAs and 401(k)s that are managed by mutual fund, life insurance, and other kinds of asset management companies.
While total retirement assets, in private and government plans, increased by 3% to $8.41 trillion in 2005, assets in traditional pension plans, called defined benefit plans, fell by 2%. That just continues the decades-long trend away from traditional pension plans that pay out a set benefit in retirement. In contrast, the amount in private defined contribution plans, where how much you get back in retirement depends on your contribution level and the performance of your portfolio over time, grew by 7% in 2005 to $2.84 trillion. That follows a 13% increase in 2004 and a 24% increase in 2003.
All the evidence so far says that investors who are spending down a retirement nest egg want more advice on managing risk and maximizing return than accumulators. They're also more willing to pay extra fees for products such as annuities and life cycle funds that help manage risk. The retirement asset management industry estimates that up to 80% of retiring boomers will want financial advice during these drawdown years.

In my regular Wednesday morning appearance on CNBC's "Morning Call," I recommended the stocks of these three asset management companies:

SEI Investments (SEIC, news, msgs). What's better than one growth business? How about two? SEI Investments manages assets -- about $150 billion as of the end of 2005 in its private-banking and money-management units. This business accounts for about 45% of the company's revenues. The rest comes from handling transactions for other asset managers, including registered investment advisors, pension plans, and institutional investors. Riding those two models for leveraging the growth in Baby Boomer retirement assets, SEI Investments grew revenue by 12% in 2005 and earnings per share by 15%. Profit margins look like they'll expand in 2006 as the company reaches the end of spending on the most recent stage of its international expansion. The stock trades at 19.4 times projected 2006 earnings per share. Our StockScouter rates the shares a 4 out of a possible 10.

Wilmington Trust (WL, news, msgs). Safety and growth. Not a bad combination. The managers at Wilmington Trust have demonstrated their ability to safely navigate their way through the interest-rate hikes thrown at the banking sector by the Federal Reserve. In 2005, many banks saw their net interest margin squeezed, as the Fed raised short rates (the cost to a bank of raising money) and long interest rates (what the bank can charge borrowers) stayed steady or even declined. But Wilmington Trust was actually able to increase net interest margins by 0.15 percentage points in the fourth quarter of 2005 from the fourth quarter of 2004. That helped the company beat Wall Street earnings estimates for the fourth quarter of 2005 by 6 cents a share. It also showed a 36% increase in net income from the fourth quarter of 2004. (The company is set to report first-quarter 2006 earnings before the open on Apr. 21). But the real growth story comes from the bank's asset management business for wealthy clients. Assets under management climbed to $40 billion in December 2005, and revenue from the wealth-advisory services unit has climbed at an 11% compounded annual rate since 1995. The stock recently traded at 16 times projected 2006 earnings per share. Our StockScouter rates these shares an 8 out of a possible 10.

AllianceBernstein Holding (AB, news, msgs). It sure doesn't hurt an asset manager when its asset management vehicles -- mutual funds and the like -- perform better. That been the case at AllianceBernstein recently, as the company's funds continue to improve on problematic performance in 2001 and 2002. As a result of that improvement and the addition of new products, assets under management in the fourth quarter of 2005 rose 7%, to $579 billion, from the fourth quarter of 2004. Following the 2000 acquisition of independent research company Sanford Bernstein, AllianceBernstein has worked to build-out a global research platform that would allow the company to increase its revenue from overseas institutional investors. About $180 billion of its assets now come from foreign investors. But the fastest growing part of the business, which also came over with the 2000 acquisition, is in money management for individuals. The private client business in 2005 accounted for 13% of assets under management, 34% of fee revenue and 24% of total revenue in the fourth quarter of 2005. Since the end of 2000, AllianceBernsteins's private client assets have grown by a compounded average rate of 15% a year. The stock recently traded for 19.3 times projected 2006 earnings per share. Our StockScouter rates these shares an 8 out of a possible 10.

The retirement asset growth story isn't limited to the United States. In fact, the international side of the tale is an even more exciting growth story, as the existing middle class of Europe and the burgeoning middle classes of China and India not only save for their retirement but discover U.S.-style financial products such as life insurance and mutual funds.

My two "exclusive" picks for readers of CNBC.com on MSN Money are asset-management companies that have targeted international growth markets.

Allianz (AZ, news, msgs). The four units of European insurance giant Allianz -- property and casualty insurance, life and health insurance, banking, and asset management -- do business in more than 70 countries, but until recently the company hasn't aggressively used that global reach to build sales and profits. That is changing. For example, Allianz is rolling out across Europe products from its Pimco unit, well known for its bond funds in the United States. And the company has announced a cross-border merger with Italian insurer Riunione Adriatica de Sicurta that will increase Allianz share of the Italian market, where it is already No. 2. The company's recent and continuing reorganization has targeted almost $2 billion in savings. The stock recently traded at 10.5 times projected 2006 earnings per share. Our StockScouter rates these shares an 8 out of a possible 10.

American International Group (AIG, news, msgs). The company continues to suffer from the fallout from its regulatory problems and the nasty fight with its former CEO. Those certainly didn't help in 2005 when net written insurance premiums were up just 4% versus nearly 16% growth in 2004. And the gem of the company, its foreign life insurance business, suffered, too, as the company changed its product mix and booked a $140 million charge against earnings from its Singapore operation. But take away the results of those charges and the effects of a stronger dollar in 2005 (not likely to be a problem in 2006 with the dollar retracing last year's gains) and the international life insurance business still managed better than 10% growth. The stock recently traded at 11.4 times projected 2006 earnings per share. Our StockScouter rates these shares a 6 out of a possible 10.

Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: American International Group. He doesn't own short positions in any stock mentioned in this column.

MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.