The Federated Investors Inc. (FII) investment philosophy includes utilizing a core set of values and seeking low-risk opportunities. Due to its conservative nature, the investment manager has been slow to expand internationally. The book value for Federated has been flat for the last five years, but recent international expansion includes breaking into the U.K. market with the acquisition of London-based Prime Rate Capital Management. Further, in the third quarter 2012, Federated expanded its European distribution capabilities through an agreement with Bury Street Capital, a European distribution firm based in London. Federated also expanded into the Asia-Pacific region by opening an office in Australia.
Retail investors can invest with the company, where the asset management company offers investment funds with an income focus, or investors can invest in the stock itself and get 4.3% annually in the form a dividend. Its annual dividend comes out to $100M and its cash on hand is $368M. Federated also offers impressive growth. Federated saw recent quarterly results that were better than expected on the back of higher equity assets. Federated has an impressive ability to generate strong free cash flow that should lead to significant growth in the long run. The asset manager generated almost $450M in FCF over the last year.
As investor confidence rebounds, more demand for Federated products should take place. Helping push the demand for its income-oriented products is the low-rate environment, where investors are searching for yield. Current pressures for money market funds and tightening regulations still leaves some uncertainty. Federated is still making the most with its money market funds. In September 2012, Federated acquired $4.4 billion worth of money market assets from Fifth Third Asset Management Inc. The increased assets under management furnished Federated with various new fund offerings that have the potential to benefit its clients.
The next best dividend option among asset management stocks is T. Rowe Price Group, Inc. (TROW) with a 2% dividend yield. With some $660B of AUM for 3Q, T. Rowe is also the second best return on equity behind Federated. Franklin Resources, Inc. (BEN) is the other major asset management firm competing with the likes of Federated and T. Rowe. SEI Investments Company (SEIC) and Affiliated Managers Group, Inc. (AMG) are two other investment firms competing for investor dollars. SEI has grown book value modestly over the last five years at 13% and maintains a 19% return on equity. Affiliated has one of the lowest ROEs at 7%. Investment advisory fees should be up for T. Rowe as demand for its target-dated retirement funds should draw capital as the baby boomers age out. BEN has been expanding into Asia and has a solid diversification with a focus on equities, fixed income and hybrid funds.
Federated not only pays the best dividend yield in the asset management space, but also has some solid growth and valuation prospects. The return on equity is an impressive 30%, the highest among the investment management companies. It appears that Federated has been unfairly held back on a stock price basis, when compared to major peers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.