Montgomery has also been a fan of T.Rowe Price, liking its focus on equities and solid fund performance, as well as an industry-leading concentration in defined-contribution retirement plans such as 401(k)s. He says 401(k)s will hold up better than people expect as boomers move toward retirement, because T. Rowe and others have created new products, such as funds that target a specific retirement target date, to help people manage market risks.
But T. Rowe's stock has lagged other asset managers due to a big drain of assets from its international institutional business, and it missed third-quarter earnings estimates. Profits were $303.6 million, or $1.12 a share, 4 cents below analysts' consensus forecasts. It has been outshined by its Baltimore neighbor, Legg Mason, the best performer of the last two years among big mutual fund companies, which has benefited from big stock repurchases.
Select mutual fund and ETF company year-to-date stock performance
(Source: Google Finance, through Oct. 28)
- Legg Mason: 17. 6 percent
- Invesco: 7.4 percent
- Federated Investors: 4.9 percent
- BlackRock: 4 percent
- T. Rowe Price Group: -4.72 percent
- Franklin Resources: -5.8 percent
- Affiliated Managers Group: -9 percent
- Eaton Vance: -14.3 percent
- WisdomTree Investments: -35 percent
"T. Rowe is cheap, but it could be a value trap," Montgomery said.
Analysts as a group are not especially high on BlackRock, the largest asset manager, with more than $4 trillion under management, which had big stock gains the last two years before dipping 3 percent so far in 2014. BlackRock hasn't recently been able to meet management's target for annual growth of 5 percent in its assets under management, excluding investment returns—the firm has boosted its assets under management by just under 4 percent in the last 12 months, excluding assets from acquired firms.
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BlackRock's topped earnings expectations in the third quarter, but shares are relatively expensive at 16.5 times this year's expected earnings, compared with 15.1 for Invesco. BlackRock has also been a weaker performer in managing stock funds—only 43 percent of its actively-managed stock assets are in funds that have matched or beaten their benchmarks for the last three years, the company said at a September investor conference. Despite that, tight expense control and stronger than 5 percent growth in high-fee areas like ETFs and defined-contribution plans have helped BlackRock boost profit 23 percent in the first nine months of 2014.
"We had outflows in high-yield [bond funds] that was environmental. We had outflows in European equities that was environmental," CEO Laurence Fink said in BlackRock's quarterly conference call with analysts. "On the positive side, we had inflows in other products."