Asset Managers You May Want to Manage

 | Sep 15, 2011 | 1:39 PM EDT
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There are asset managers and then there are, well, asset managers.

Bernie Madoff certainly did not add to the esteem of those in the asset-manager world, but some are very sophisticated and successful and attract amounts of money unheard of a few years ago.

Blackrock (BLK) is perhaps the most notable example. The world's largest asset manager had $3.66 trillion of assets under management as of June 30, 2011. That impressive number comprises equity, fixed income, cash management and real estate, among other asset classes.

Besides managing assets, Blackrock has iShares, the largest U.S. provider of exchange-traded funds.

The company's strategy includes both internal growth and acquisitions. In the last five years it has purchased State Street Research, Merrill Lynch Investment Managers and Barclays Global Investors. When you invest in the shares of Blackrock, you are buying into arguably the world's premiere asset manager.

My Peter Lynch-base strategy, which is modeled after Lynch's investment approach, predicts good things for Blackrock. This strategy focuses on the P/E/G ratio, a measure of how much the investor is paying for growth (the P/E ratio relative to the growth rate). Blackrock's P/E is a modest 12.32 percent and its EPS growth rate is 21.91%, based on the average of the three-, four- and five-year historical growth rates. This provides a P/E/G of 0.56, well below the strategy's 1.0 maximum.

Blackrock also exceeds the strategy's minimums for equity-to-assets ratio and return on assets.

My strategy based on the writings of Martin Zweig also delivers positive indications for Blackrock. Revenue growth (37.26%) is higher than EPS growth (21.91%). In addition, the strategy calls for revenue growth to equal or exceed profit growth because for earnings to continue to grow over time, they must be supported by comparable or better sales growth and not just by cost cutting or other non-sales, profit-boosting measures. The strategy also yields positive results for Blackrock's earnings growth, modest P/E ratio and sales growth that is increasing.

Blackrock is not the only asset manager my guru-based strategies like at this time. Waddell & Reed Financial (WDR), whose products include Ivy mutual funds, maintains a sales force of about 1,800 financial advisors who only sell Waddell's products, while also supporting a wholesale channel that serves broker/dealers, registered investment advisors and others. Assets under management total about $91 billion. 

The Lynch strategy likes Waddell, in part because of its favorable P/E/G ratio of 0.65. This is based on a P/E of 13.45 and growth rate of 20.83%, which is the result of averaging the three-, four- and five-year historical EPS growth rates. Also in the company's favor is its excellent equity-to-assets ratio (49%) and strong return on assets (19.07%).

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