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Asset Manager Rally May Be Cut Short Without Pickup In Flows

By Corrie Driebusch Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Asset manager stocks are sharply outperforming the broader market in 2012, and while some of the gains can be attributed to the group's underperformance last year, analysts warn the rally is unlikely to persist unless retail flows into mutual funds rise. The asset management sector is traditionally correlated with the broader market, with an estimated beta of about 1.3 times the broader market's gains, but while the Standard & Poor's 500 index is up 9.2% year to date, many asset managers are up 20% or more so far this year. Janus Capital Group Inc. (JNS) is up 44% year to date, while Invesco Ltd. (IVZ) and Franklin Resources Inc. (BEN) have each rallied 24%. Part of the rally is a result of last year's losses for the sector, with financial stocks generally returning to investor favor this year as the U.S. economic picture brightens and concerns about euro-zone debt abate. Shares of mutual fund managers took a beating in 2011 as these geopolitical and economic uncertainties, along with related violent market swings, pushed many retail investors to the sidelines. But analysts say that while the gains in the sector are understandable, a cautious outlook is warranted. Investors may be flocking to the stocks of asset managers, but they don't appear to be nearly as excited about their actual products yet. Retail investors have been tepid when it comes to putting money into mutual funds so far this year. "Investors are tip-toeing back to riskier categories; they're not moving forward in a strong fashion," said Jeffrey Hopson, analyst at Stifel Nicolaus & Co. Traditionally, the beginning of the year is a boon for flows into mutual funds as contribution limits on retirement accounts reset. But this year retail investors aren't meaningfully putting money into mutual funds that invest in stocks. Through February 22, investors have poured about $53 billion into bond funds, while $4.9 billion have gone into stock funds, according to data from the Investment Company Institute. Investors have actually taken out $839 million from domestic equity funds. In comparison, during the first two months of 2011 investors poured $30 billion into equities, though they put far less money into bond funds during the period. The lack of money flowing into funds that invest in stocks doesn't necessarily bode well for asset managers, said Robert Lee, analyst at Keefe, Bruyette & Woods. While flows into any type of fund are always better than outflows, stock funds yield higher fees for mutual fund managers. "We're not seeing any flood into traditional equity products, so traditional equity funds still remain challenged," Lee said. At first glance, this isn't too large of a problem for mutual fund managers' earnings. Even if retail investors did nothing, if the market climbs 10%, their assets will also climb around that amount and any increase to expenses will lag, Hopson said. But the rally can't last forever. "I think we've gotten to the point in valuation that flows should be taken more into consideration," Hopson said. "Investors should be a little more sensitive to whether flows pick up." -By Corrie Driebusch, Dow Jones Newswires; 212-416-2143; corrie.driebusch@dowjones.com

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