By Deborah Levine
A DOW JONES COLUMN
Money is moving into stock mutual funds at the fastest pace in
four years, brightening prospects for asset-management firms
focused on equities and challenging those weighted toward bond and
money-market funds.
Stock funds attracted more money in the first seven weeks of the
year than at any time since the start of 2007, to the tune of $31.9
billion, according to the Investment Company Institute, a
fund-industry trade group.
Bond funds, in contrast, have seen an exodus of $353 million so
far this year, in large part due to outflows from tax-exempt
municipal bond funds, according to ICI data.
If this shift continues, asset managers that oversee more money
in stock funds will enjoy the spoils, though shareholders of these
companies will need to be discriminating.
"We'll continue to see this re-risking by investors, given the
strong equity markets, and as the outlook for rising rates makes
fixed income less attractive," said Jason Weyeneth, who covers
asset-manager stocks for brokerage Sterne Agee. "Near-term, that
will drive further growth in the demand for equities."
Two of the publicly traded fund companies most exposed to
equities, Waddell & Reed Financial Inc. (WDR) and T. Rowe Price
Group Inc. (TROW), "are well positioned to benefit from this
trend," Weyeneth said.
The bulk of outflows from bond funds have been from the
municipal sector, which is extending the longest streak of monthly
losses since late 2008. That selling puts Franklin Resources Inc.
(BEN) under a microscope, he noted, since the company is one of the
largest managers of muni bonds.
Spotlight On Stocks
For fund-management firms, financial statements are already
starting to reflect this broad move into stocks. But the firms' own
market performance has diverged, highlighting differences in how
they operate.
"In the past, in a stable environment for stocks and the
economy, it was easier to look at the flows and see what a company
was expected to do," said Greggory Warren, senior stock analyst at
investment researcher Morningstar Inc. "A lot of managers got
clipped during the decline, which exposed a lot of weaknesses for
firms."
T. Rowe's equity funds in January generated inflows of $700
million, for example, while bond-flow inflows totalled $480
million, both turning around from outflows in December, according
to analysts at Sandler O'Neill. About 76% of T. Rowe's assets under
management are in equities.
Waddell's equity inflows in January, meanwhile, remained strong
at $570 million after solid inflows in December, according to
analysts at Sandler. Equities make up 84% of its assets under
management.
Janus Capital Group Inc. (JNS), which has 91% of its managed
assets in equities, had inflows to its stock funds last month that
nearly reversed December's outflows, according to Sandler.
Stock Funds Vs. Fund Stocks
But shares of most of these fund companies haven't gained much
so far this year from the inflows, in many cases because investors
piled money in at the end of last year when the trend started, said
Weyeneth.
Shares of T. Rowe, BlackRock Inc. (BLK) and Janus have posted
single-digit gains. Janus in particular has been weak because its
funds haven't performed as well as some others, so seem likely to
draw in fewer funds, he said.
Waddell & Reed is an exception. Its shares have gained more
than 16% this year compared with 5% for the Standard & Poor's
500 Index.
Waddell's earnings have also stood apart from its peers--but
they've lagged. The firm's profits have risen 16% on average in
each the last 10 quarters--less than half the pace of BlackRock and
T. Rowe, according to FactSet Research. Janus' quarterly earnings
have grown 113% on average over the same period.
Meanwhile, the Standard & Poor's 500-stock index has seen
earnings growth average 10%. Quarterly earnings in the financial
subsector of the benchmark U.S. index have shot up 108% on
average.
Bond, Money-Market Funds
Bond-focused asset managers risk losing more funds. Investors
have grown more convinced that the global economy is showing more
sustainable signs of life, and are shifting out of the relative
safety of fixed-income.
But the outflows have been concentrated in the U.S. muni sector,
after a handful of analysts predicted massive defaults by public
entities, including states and cities. Also, at the end of the
year, issuers flooded the market with new bonds for sale under the
Build America Bonds program before it expired at the end of
2010.
Bond flows have been split: taxable bond funds--which include
Treasury bonds, corporate debt, high-yield bonds, sovereign debt
and housing-related debt--have attracted about $16.8 billion in new
money so far this year.
The municipal sector, meanwhile, has seen $16.5 billion head for
the exit so far in 2011, according to ICI.
Yet some analysts say the worst could be over for muni-bond fund
selling.
"Munis are going to settle down here and those outflows will
moderate," Jeffrey Hopson, an analyst at Stifel Nicolaus. "We've
gone from panic to reality and people see that there are some
challenges, but by and large they don't think there are major
problems that are going to affect a broad range of municipal
securities."
Concern over munis has put a spotlight on Franklin because of
its relative prominence among municipal bond fund managers. But the
firm's business is mostly in stock funds, which account for 55% of
assets under management, according to Sandler.
Profits and shares have also been strong. Franklin's earnings
rose 41% in the first quarter, and have grown 32% on average over
the past 10 quarters. The stock is up about 12% this year.
One fund giant that may struggle with outflows is Federated
Investors Inc. (FII). About 83% of its assets are in low-yielding
money-market funds.
Investors yanked $6.2 billion from the firm's money-market funds
in January, along with outflows in other bonds and equities,
according to Sandler.
Federated shares are up 6% so far this year. Its earnings growth
has been negative or flat in most of the past 10 quarters,
declining by an average of almost 11%.
ETFs Change The Game
Investors in asset-management stocks have shown they're willing
to back a company even if the fund flows carry warning signals.
BlackRock Inc., with 58% of its funds in stocks, saw outflows
from both equity and money-market funds last month totaling, $8.4
billion, according to Sandler.
Still, BlackRock shares rose in the fourth quarter, making it
difficult for investors to make a call on BlackRock shares based
simply on flows.
"It is getting harder and harder to 'play' BlackRock for flows,"
analysts at Ticonderoga wrote in a report. "Even with outflows for
most of [2010], the company continues to show positive earnings
growth and margins."
One factor in BlackRock's favor: Stock-focused fund companies
benefit when equities appreciate. The S&P 500 ended 2010 up
about 13%, its second consecutive year of double-digit gains.
BlackRock also benefits from the rapid growth of exchange-traded
funds through its iShares unit, which controls about 44% of the ETF
market.
(Deborah Levine writes for MarketWatch. She can be reached at
415-439-6400 or by email at AskNewswires@dowjones.com.)