Saturday, August 19, 2000

The Sophisticated Investor

Buying into mutual funds a smart move

By John Waggoner
USA Today

        Your stock fund may be having a miserable year, but here's some comfort: Your mutual fund company is really raking in the cash. There. Feel better now?

        No? Well, fortunately, you may be able to share some of your fund company's gains. And make a mental note: In a bull market, companies that sell financial services are often the best places to be.

        The Lipper Management Company Index, which measures 12 of the largest fund-company stocks, has soared 50.5 percent this year. In contrast, the average stock mutual fund is up just 4 percent.

        Why have fund companies done so well? In large part, because funds levy a fixed charge — the management fee — on the assets they manage. The more assets they manage, the more mon ey they make.

        And money has poured into funds at a record clip this year. According to the Investment Company Institute, the funds' trade group, investors put $212 billion into stock funds the first six months of the year.

        That's up from $90 billion the same period in 1999. The industry is collecting fees on $7.1 trillion in assets.

        Consider this: Suppose a fund company charges a 1 percent management fee on $1 billion in assets. The fund would collect $10 million in fees on that fund alone.

        Granted, mutual funds have overhead like any other business, and they are spending prodigiously on building Internet sites and, for that matter, money managers. Nevertheless, torrid asset growth generally translates into torrid revenue growth.

        Consider Amvescap, which owns the AIM funds and Invesco, one of the U.S.'s fastest-growing fund companies. Sales have grown 51.2 percent the past 12 months versus 29.3 percent for the fund industry and 17.9 percent for the Standard & Poor's 500 index. Furthermore, the fund industry is extremely profitable. Amvescap's net profit margin, for example, is 18.2 percent versus 7.3 percent for the S&P.

        Naturally, price matters, too. And Amvescap currently sells for 37.8 times its past 12 months earnings. That's pricey. But other fund company stocks are relative bargains.

        Consider Franklin Resources, which offers the Franklin/Templeton funds. These funds have been wildly out of favor. Franklin is noted primarily as a bond shop, and investors these days simply have no interest in boring old bonds. Templeton is the premier international bargain hunter. Unfortunately, investors have little interest in foreign stocks or, for that matter, in value stocks.

        Not surprisingly, sales growth has been glacial: 3.5 percent the past 12 months. But the stock is selling for just 15.9 times earnings. If bonds and international stocks ever get popular again with investors — and they will — Franklin stock could look exceptionally attractive.

        And while mutual funds are usually circumspect about buying oth er fund companies' stock, Franklin seems very popular with other value investors, according to Morningstar, the mutual fund tracker. Major holders include the Torray fund, Ariel Appreciation, Strong Schaeffer Value and FAM Value.

        Then there's Stilwell Financial, the recent spinoff from Kansas City Southern, which includes the Janus funds, the Berger funds and DST, a fund data-processing company. The stock sold off dramatically on news that ace manager James Craig would leave Janus. At 31 times earnings, however, the stock is still relatively expensive.

        Finally, there are the somewhat less-than-pure mutual fund plays. For example, Marsh & McLennan (MMC) is primarily an insurance company. But it also owns The Putnam Group, one of the nation's premier broker-sold fund companies. Marsh is up 31 percent this year. Other interesting fund plays:

        • Charles Schwab (SCH). The nation's largest discount brokerage is also one of the largest sellers of mutual funds through its Mutual Fund Marketplace program. And it has several of its own funds. The stock is up 57 percent this year.

        • Merrill Lynch (MER). The largest brokerage in the world, Merrill also has a big family of funds. It's up 73 percent this year.

        Stocks of mutual fund companies, like all financial services companies, are creatures of the bull market. In a sudden downturn, you'll hate these stocks.

        But if you're sick and tired of paying mutual fund fees, investing in a fund company is one way to get even.

        John Waggoner answers questions at His e-mail address is



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