Betting on Brokers and Investment Managers

 | Mar 06, 2013 | 9:00 AM EST  | Comments
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trow

The market goes up, the market goes down, and the market goes sideways. In all these situations, someone is immune to the vagaries of the market and can make money whatever the market's direction: your broker or investment adviser.

Brokers and investment managers collect commissions and fees whether or not you make money, as evidenced in Woody Allen's immortal definition of a stockbroker: someone who invests your money until it is all gone.

I am overstating, of course. Brokerages, advisers and asset managers felt the effects of the 2008 financial meltdown, but they do earn commissions and fees even when their clients' portfolios are heading south. That puts them in a position to do reasonably well even when others are performing poorly.

Some brokerage and advisory firms are currently earning strong recommendations from my guru strategies, and these firms are worth investing in. The strategies I use to analyze stocks were modeled on the writings of various A-list investors, such as Peter Lynch and David Dreman. I created these strategies because I did not want to reinvent the wheel when such great minds had already determined effective ways to analyze companies.

One company in the investment business favored by my Lynch-based strategy is Franklin Resources (BEN), the giant mutual fund and investment management firm, which has more than three-quarters of a billion dollars under management. The company markets its services and products under the Franklin and Templeton brands, as well as others. The Lynch strategy focuses on P/E/G ratio, which is the price-to-earnings ratio relative to growth, and measures what the investor is paying for growth at today's stock price. A P/E/G of up to 1.0 is acceptable, and Franklin is just below this threshold, with a 0.99 P/E/G. Also in its favor is an equity-to-assets ratio of 62%, way above the minimum 5% the strategy requires.

T. Rowe Price Group (TROW) is a major asset manager that has $577 billion in assets under management. My Warren Buffett-based strategy finds value in this firm. One reason is the competitive advantage of its name; T. Rowe Price is a well-known and respected brand in the asset-management and advisory business.

Although its earnings per share fell during the Great Recession, it never lost money. Its EPS, in fact, enjoyed an annual growth rate of 16.0% during the past decade. In this same time period, the company generated a return on investment of 19.7%. These are periods that include the Great Recession. The Buffett strategy projects out for 10 years what it expects the investor's annual rate of return will be. For Price, this comes to a healthy 13.6%.

These companies are well positioned in their industry, and they have solid track records and good prospects. Even if you don't like your broker, you can like these companies.

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