7 Ways to Invest in Investment Management

While the general banking sector has been hit hard from the Covid-19 crisis, more specialized investment firms have better weathered the economic uncertainty. Several contributors to MoneyShow.com highlight some favorite financials involved in private equity, business development and asset management. Bruce Kaser, Cabot Undervalued Stocks Advisor Equitable Holdings has many appealing traits: a solid position in its industry, strong finances and undervaluation. Also, there is a potential catalyst -- a possible sale/spinoff of its AllianceBernstein business. Equitable owns two principal franchises: Equitable Financial Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. , a highly respected investment management and research firm. Equitable, with a 161-year history, was acquired by French insurer AXA in 1992. Through subsequent stock sales, AXA currently owns less than 10% of Equitable. With its newfound independence, Equitable may be considering strategic changes for its 65% ownership in AllianceBernstein. Any sale of AllianceBernstein is likely to unlock further value. Meanwhile, Equitable Holdings is well capitalized and has significant liquidity. Its diverse, high-quality investment portfolio is hedged against adverse changes in interest rates and equity markets. Profits are expected to fall 14% in 2020, then rise 18% in 2021. Equitable shares are undervalued, with a recent 2020 P/E of 4.6x. With its $37.78 in per-share book value, EQH trades at 0.50x price to book value, which is a significant discount. EHQ shares are appropriate for dividend investors, growth investors and traders. While the shares -- which yield 3.5% -- may trade in sync with the overall stock market, given its investment-driven operations, we see more upside than downside. The stock earns my Strong Buy rating. Tim Plaehn, The Dividend Hunter Main Street Capital Corporation is a business development company (BDC), which provides debt and/or equity financing to small and medium-sized corporations. BDCs operate under special legal and tax rules that make them pass-through entities. They do not pay corporate income tax and are required to pay out 90% of earnings as dividends to investors. Main Street Capital a high-quality company -- by far the top of the pack out of the 50 or so publicly traded BDCs. Most focus on the lending side, making high interest rate loans. Main Street Capital has taken a different approach. It views itself not only as a lender, but also as a partner to many of its customers. As a partner, it receives equity ownership in the businesses and provides expert advice to help the companies succeed. Main Street Capital continues to receive partnership distributions even after loans have been paid off. If a client company gets sold, Main Street Capital will earn capital gains. The result is that the company has paid monthly dividends that have steadily increased since the company went public a decade ago. Many other BDCs were forced to cut their dividend rates during that same period of time. Main Street Capital has been a Dividend Hunter stock since July 2014. The stock price is down 33% compared to pre-crash levels. The company has suspended its semi-annual dividend payments but has committed to continue the monthly dividends, giving the stock an 8% yield. Ingrid Hendershot, Hendershot Investments SEI Corporation is a leading global provider of technology-driven investment processing, investment management and investment operations solutions that help corporations, financial institutions, financial advisors and ultra-high net worth families create and manage wealth. Today, SEI Investments delivers comprehensive investment platforms, services and infrastructure through its 3,820 employees serving more than 11,300 clients globally, including 11 of the top 20 banks and 45 of the top 100 investment managers. With its business model focused on recurring revenue from assets under management and administration, SEI generates highly profitable operations. Net profit margins and return on shareholders' equity have averaged over 27% and 28%, respectively, during the last five years. SEI generates robust free cash flows, which have totaled about $2.3 billion over the last five years. It has paid dividends for 32 years. The dividend has increased for the past 13 years, compounding at an 8% annual rate during the last five years. SEI has also repurchased nearly $1.6 billion of its stock during the last five years. SEI Investments is a high-quality company with a proven business model, profitable growth, robust free cash flows and a strong balance sheet that should position the firm well to weather the Covid-19 crisis. Investors should consider banking on SEI Investments for attractive long-term investment returns. Bryan Perry, Cash Machine I want to press our exposure to well-capitalized lenders of private businesses with a high focus on companies with world-class management teams. Bain Capital Specialty Finance operates as a business development company (BDC) specializing in direct loans to middle-market companies. It typically invests in companies with EBITDA between $10 million and $150 million. Bain Capital seeks to invest in senior investments with a first or second lien on collateral, senior first lien, stretch senior, senior second lien, mezzanine debt, junior securities, other junior investments and secondary purchases of assets or portfolios that primarily consist of middle-market corporate debt. The company's debt-to-equity (net of cash) ratio as of March 31 was 1.78x. Total fair value of investments ending first-quarter 2020 was $2.48 billion. Shares of BCSF were trading at $20 prior to the Covid-19 selloff. The current dividend yield is at 13%, making for a fine addition to our Extreme Income Portfolio. Buy Bain Capital under $13. Mike Cintolo, Cabot Growth Investor Blackstone is one of the biggest and best bull market stocks out there, with a total of $538 billion of assets under management invested in real estate, private equity, hedge fund solutions and credit/insurance products. Cash generation has been solid for a while (fee-related earnings, which are more stable than one-time realizations, rose 25% in Q1, thanks in part to fee-earning assets rising 20%), which has led to growing dividends ($1.97 per share during the past year, yield of 3.5% - and Blackstone is a C-Corp. now so dividends are qualified). While virus-related economic disruptions hit asset prices (analysts see earnings down some in Q2 and Q3), Blackstone is really a play on the economic recovery, especially as the Federal Reserve floors the accelerator -- if the global economy comes back and key areas like real estate strengthen, there's little doubt the company's distributable income will continue to surge in the years ahead. Analysts see next year's earnings up 42% from this year's guesstimates. As for the stock, it broke out of a big consolidation last April, had a solid run into February and then gave it all back during the crash. But the comeback from there has been solid, and the last four weeks have been just what the doctor ordered, allowing BX to catch its breath. If the broader market picks up steam and BX shows some power above $60, we could test the waters again. Ben Reynolds, Sure Dividend Ameriprise Financial is an asset manager with nearly $12 billion in annual revenue. Its biggest competitive advantage is its brand strength within the asset management industry. The dividend is highly secure. Using expected earnings per share of $15.01 for 2020, Ameriprise has a dividend payout ratio of just 28% for the year. This is a very low payout ratio that leaves plenty of room for the high rate of dividend increases to continue. Assets under management continue to make new highs, driving increased revenue and operating profits. Ameriprise also continues to pay down debt and repurchase stock, both of which will help grow future earnings-per-share. We expect 8% annual earnings-per-share growth through 2025. Based on 2020 expected EPS of $15.01, the stock recently traded for a P/E of 9.7. The stock appears to be undervalued. The combination of valuation changes, 8% annual earnings growth, and an 2.9% dividend yield results in expected annual returns of 14.3% over the next five years. Franklin Resources manages the Franklin and Templeton families of funds. The firm has established itself with a long and successful track record of industry outperformance. We believe Franklin Resources retains multiple catalysts for future growth. First, as the U.S. population ages, the need for retirement planning services will be higher than ever. Franklin Resources will also be able to grow AUM through acquisitions, such as the recent $4.5 billion acquisition of Legg Mason, which had AUM of over $800 billion as of January 31st, 2020. More recently, Franklin Resources acquired AdvisorEngine, a digital wealth platform that provides technology and consulting services to over 1,200 financial advisory firms in the United States. Combining valuation changes with 4.0% expected annual earnings growth and a 5.3% dividend yield, we expect total returns of 13.6% per year for Franklin Resources stock over the next five years.

7 Ways to Invest in Investment Management

These financial favorites are involved in private equity, business development and asset management.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 10/30/2020

Thursday on Real Money Pro

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.