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Bets on asset managers may promise good payoffs for the long term


When a sustained rally returns once again to the markets, the rising tide should lift the boats of publicly-held asset managers even more so than other stocks.

Because stocks of fund companies and other investment firms have been battered in the recent downturn, they could now be a good buying opportunity in anticipation of the inevitable upturn, some analysts say. "Investors with longer-term investment horizons might find current valuations attractive ... given the long-term track record of asset managers outperforming the market," says RBC Dominion Securities analyst Geoffrey Kwan.

Fund companies and investment firms get a lift not only from the market performance of their assets but from higher flows of cash into their portfolios during rising markets.

"Our strategy and technical research teams are cautiously optimistic that equity market performance has entered into a bottoming process," Mr. Kwan wrote in recent report.

"A high degree of pessimism matched by an aggressive policy response from the U.S. monetary and fiscal authorities over the past month has created conditions that raise the odds of better price action for the year ahead."

Under a stock market rally scenario, Mr. Kwan favours Gluskin Sheff + Associates Inc., a small-capitalization stock that he rates as an "outperform," with a one-year stock-price target of $25.

Shares of Gluskin Sheff would have more upside potential in a rising market because its portfolios have performance fees, and its assets are all invested in equities, Mr. Kwan wrote.

The fact it caters to the high-net-worth niche is attractive, he added. "We view [that] more positively than the retail and institutional markets, given higher expected growth, better asset retention and decent pricing power."

Among larger-cap stocks, the analyst likes Canada's largest fund company, IGM Financial Inc., which he rates "outperform," with a one-year stock price target of $51.

The firm's Investors Group unit, which sells funds through its own advisers, still has positive sales momentum, but there is also potential for a turnaround at its Mackenzie Financial unit as the relative performance of its Ivy funds improve, he added.

National Bank Financial analyst Karin Huo has an "outperform" rating on IGM Financial, CI Financial Income Fund and AGF Management Inc.

Her top pick is CI Financial, on which she has a one-year stock price target of $27. It is the "best-positioned asset manager, with a wide offering of products, vast distribution networks, strong investment-performance results, high quality of service and low fees," she said in a report.

She has a stock price target of $54 on IGM . "We continue to believe IGM Financial is the most stable asset manager, and any downturn in the market should have a less negative impact on IGM than any of the other asset managers."

The firm's Investors Group's sales model "provides earnings and assets under management stability, while Mackenzie Financial provides growth prospects but more volatility," she wrote.

Ms. Huo's stock price target on AGF is $32. "While 2008 may be a tough year for AGF, due to its higher-than-average focus on international equities, we believe it is well-positioned for growth once the market environment improves," she said. AGF's trust company is also a "hidden gem," and represents a growth opportunity in the current tough equity environment, she added.

Analyst John Aiken of Dundee Securities Corp. agrees that it is "an excellent time" to buy asset managers" if investors are willing to hold the companies for three to five years.

Mr. Aiken, however, is not currently recommending any asset manager because of his near-term cautious outlook. "I am neutral or have an underperform [rating] on all of the asset managers," he said in an interview.

"I can't guarantee that valuations are not going to be lower in two to six months," he said. "I just believe that there is further weakness coming down the pipeline. We haven't seen the full economic spillover from the United States [which could be in a recession] hitting Canada."

Asset managers ranked by stock price declines

SymbolMarch 6 close52-week low52-week highYieldPE ratio% drop from 52-week high
Jovian CapitalJOV-T$0.77 $0.65 $1.02 0.0%0.024.5%
IGM FinancialIGM-T$41.90 $41.18 $56.34 4.6%12.625.6%
CI Financial Income FundCIX.UN-T$21.35 $21.12 $30.75 8.8%9.730.6%
Sceptre Investment CounselSZ-T$9.00 $7.75 $13.87 5.4%20.935.1%
Saxon Financial SFI-T$16.00 $15.58 $24.89 5.7%12.635.7%
Gluskin Sheff + Associates GS-T$19.99 $18.87 $31.22 2.2%7.836.0%
AGF ManagementAGF.B-T$21.95 $21.95 $40.00 3.6%1145.1%
Dundee Wealth DW-T$12.05 $12.01 $22.31 0.6%0.046.0%
Mavrix Fund ManagementMVX-T$0.70 $0.60 $2.24 0.0%0.068.8%



© 2007 The Globe and Mail. All rights reserved.

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