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Fund Families� Parents Have Potential
By Laura Pavlenko Lutton   Morningstar

Mutual-fund families such as T. Rowe Price, Invesco, Clipper, and PBHG are familiar names to active investors. Many of us have these funds to thank for sizeable returns over the years. But it’s not just individual investors who are profiting from mutual funds--the money managers themselves are doing just as well, if not better.

Asset managers are profiting from record-level investments in the stock market and an enviable cost structure. Money has been flowing into stocks and mutual funds, yet asset managers’ costs have remained in check. Profits have therefore increased at a nice clip alongside revenues. This growth should continue as baby boomers accumulate wealth and their need for asset-management services increases. A combination of steady revenue improvements, low costs, and strong growth potential make asset managers very appealing stock investments.

 Picks of the Money-Management Industry
Growth
Grade
Profit
Grade
Financial
Health
Grade
Valuation
Grade
YTD
Return
( % )
Amvescap AVZ
A+
A
B+
F
9.1
Franklin Resources BEN
D
A+
A+
D+
-13.5
John Nuveen JNC
C+
A+
A
N/A
0.5
Neuberger Berman NEU
B
A+
C
C
10.5
T. Rowe Price TROW
A-
A+
A+
N/A
-9.0
United Asset Management UAM
D+
A
B-
F
-19.5
Morningstar data as of 03-06-00.

Best All-Around Player
A leading choice among asset managers is T. Rowe Price TROW. The seventh-largest fund family gets top grades from Morningstar for growth, profitability, and financial health. The company has nearly doubled its revenue since 1996, and its key profitability ratios, including returns on assets and equity, have also been steady to improving.

Another feather in T. Rowe’s cap is its conservative bent and established management team. Its mutual funds tend to hold stock in proven companies instead of the next big high-tech thing. That approach hurt returns in 1999, but it appears to be a smart long-term strategy. Top company executives, who are led by T. Rowe veteran George Roche, avoid many mistakes by making collective management decisions.

T. Rowe’s successes are not big secrets, which explains why this stock has traditionally sold at a slight premium. But so far in 2000, the stock has been off by about 9%, which makes its shares more attractive. Morningstar.com senior analyst Olivia Barbee recommends picking up this stock when it dips to about $32 per share.

Best Growth Story
For an asset manager with international flair, consider Amvescap AVZ. The company, which is based in London and has operations worldwide, is the product of a 1997 merger between AIM Management Group and Invesco. Like T. Rowe, Amvescap’s growth, profitability, and financial-health grades from Morningstar are high due to the firm’s strong financial performance in recent years.

While some of Amvescap’s AIM and Invesco funds are a bit riskier than T. Rowe funds, Amvescap’s diverse international operations are a plus. The company is poised to profit, for example, from the anticipated financial deregulation in Japan, and it has significant operations elsewhere in Asia and throughout Europe. Amvescap may be exposed to global economic turmoil in the future, but the company’s balance in many regions should even out returns over the long run.

Amvescap’s shares have been doing well so far this year--up about 9%--so this stock’s high price tag is a strike against it. But Amvescap has traditionally posted above-average returns (its five-year average return is 39%), and those may continue given the company’s bright long-term growth prospects.

Best Potential Turnaround
Investors who are searching for a bargain among the money managers should take a look at PBHG parent United Asset Management UAM. Granted, this stock is cheap for a reason. UAM’s profits declined by 22% in 1999 after several managers misstepped and clients withdrew their money. The company’s president also left in late 1999, and the firm’s founder has said he is retiring.

Investors who buy this stock now would be picking up shares at just 14 times forward earnings, which is below the industry average. Shareholders should be prepared, however, to hold on until UAM can put a new management team together. If those newcomers have a clearly defined mission and can execute a turnaround, UAM shareholders should profit nicely.

Laura Pavlenko Lutton is an analyst with Morningstar.com. She can be reached at laura.lutton@morningstar.com.  

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