James Moore: Fund-lovers can prosper but must choose carefully
Investment View: Rathbone's mainstay is people with at least half a million or so sitting around
Fund managers aren't bankers, but the accusation that they behaved as "absentee landlords", sitting by while bank bosses blew their businesses up, means they aren't winning any popularity contests right now.
One reason why they've done little to resist some outrageous City pay deals is because it could be argued that they are part of the problem. An awful lot of actively managed funds fail to beat their benchmarks, and yet fund managers are usually richly rewarded for failing.
That is an issue for investors. Compensation ratios at fund management firms – the amount of revenue taken by staff – can look remarkably similar to those at investment banks.
And the markets are tough. Even with the pitiful returns available from cash and bonds, investors are wary of committing their cash to their equity funds (which offer the best margins), preferring to sit on their hands.
External shareholders (fund managers tend to own big chunks of their employers) need to be very sure that their interests are being served just as well as the interests of the golden circle of top staff before investing. And they need to pick carefully.
One company that this column has backed for a while as a recovery play is Aberdeen Asset Management. Its role in the split-capital investment trust scandal is a black mark – that nearly broke the company. But Aberdeen took the hit, paid out compensation and has emerged a dramatically different, and more successful business.
It is no longer a screaming bargain, having recovered much of the ground lost in August.
However, even though shares outperformed last year they still trade on only 8.6 times this year's prospective earnings, with a solid forecast yield of 4.3 per cent. They're a buy.
Jupiter is another company that will repay long-term investors. At 11.4 times full-year earnings, yielding 3.5 per cent, it trades at a premium to Aberdeen, but the shares are still way off last year's highs.
What works about the company from an investment standpoint is that it is sensibly run and unlikely to indulge in deals that could destroy value. It also has net cash on the balance sheet, and achieved this well ahead of forecasts. We'd suggest holding for the long haul.
Henderson trades at 10 times 2012 earnings but with a prospective yield of 6.9 per cent. It is one of the largest independently listed UK fund managers, having rescued rival Gartmore.
That was not expensive, but there's always a risk with deals involving fund managers that the assets under management you have bought will head for the door. This has been happening. Henderson also faces a potentially embarrassing lawsuit from investors in one of its infrastructure funds.
The financials look reasonably attractive, partly because Henderson shares performed badly last year, but we'd be inclined to maintain a watching brief for the moment. Avoid.
F&C Asset Management presents an interesting conundrum. This column is a big fan of its corporate governance unit, led by George Dallas, who once actually voted against F&C's own remuneration report. But the company has been underperforming, and critics have said that it spent too much buying into hedge funds. That prompted the activist investor Ed Bramson to grab control after a brief, but entertaining, struggle.
Mr Bramson's fund management experience is rather limited and his record as a turnaround specialist is mixed. So far he hasn't been able to do much to address F&C's declining share price. But F&C trades on just 7.8 times forecast 2012 earnings, with a 5 per cent yield. Not for the faint of heart, but worthy of a buy.
Schroders is undoubtedly the sector heavyweight. The blue-blooded firm might have some appeal to those who value a safety-first approach. But these shares come at a hefty price tag of 14 times 2012 forecast earnings while yielding just 2.9 per cent. There are better and cheaper opportunities.
Another that might interest conservative investors is Rathbone. Its mainstay is people with at least half a million or so sitting around. They hand over their money, pay a chunky fee, and leave Rathbone to look after it. The company is rather stuffy and complacent, although its formula has served it well.
However, at 14 times 2012 earnings, yielding 4 per cent, the shares are over-priced after a good run.
Ashmore also isn't cheap but is focused on emerging markets; hence its premium rating of 15 times 2012 earnings (yielding just over 4 per cent). Its exposure to a part of the world that is actually growing makes it worth a look. Buy. This column has already mentioned the hedge fund manager Man Group as a result of its astonishing yield (now 12 per cent). The shares trade on just 9 times 2012 forecast earnings, but the company is losing clients and its funds have hit trouble. Steer clear.
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