THE FTSE 100’s 13-month high is lucky for some: Schroders and Amvescap, the UK’s two biggest quoted fund management groups.
It is a simple equation. The higher the market, the greater the value of the funds under management, the higher the value of the percentage fees. So it is that these two stocks are often among the biggest movers when the FTSE 100 takes a decisive turn in one direction of the other. And so it is that shares in Man Group – purveyor of hedge funds to the wealthy – often go in the opposite direction, since the short selling activities of hedge funds have made them popular ways to profit from the bear market.
So, sell Man Group and buy the other two in anticipation of a continuing rise in equity values? No. The long-term growth of hedge funds as an asset class will continue, and Man, with its dramatically lower stock market valuation, is the most attractive of the three. Its shares hit a record 1,407p yesterday; it continues to pull in record-breaking sums of cash to its new funds and now manages more than $30bn of assets. Still hedge funds as an asset class account for only a fraction of investment, and although there are issues of diminishing returns as more and more funds are set up, Man’s “funds of funds” approach is emerging as the preferred way to gain exposure to this type of alternative investment.
Of course, it would be foolish to sell the traditional fund managers while the market is in such a bullish phase. Schroders appears fairly valued on 23 times Deutsche Bank’s adjusted earnings forecast for the year, but the savage cost cuts at the group and the stock market rally leaves scope for the group to beat estimates. The new chief executive, Michael Dobson, is taking the right approach in moving into specialist funds – the new fad among those who advise the UK’s pension funds. Amvescap, on 22 times, should do well from the dramatic upswing in mutual fund investment in the US in recent months.
Buy, buy, buy.
