I sold my only big investment bank holding recently in UBS, and I've been thinking that, although I have a lot of holdings in insurance companies ( Markel (NYSE:MKL) and Berkshire Hathaway (BRKA) in particular ), I think it makes sense to own a US asset manager.
The primary argument for this is demographic; with the retirement of the baby boomers looming, and the massive intergenerational transfer of wealth taking off in the decades to come, I think the companies that can offer simple solutions for asset management should do well for many years. Berkshire may get some benefit from this eventually, since they do sell some annuity products, but it certainly wouldn't move the needle of their performance numbers.
There are a few different ways to go.
I could invest in one of the big brokerage houses, but their shares have climbed so dramatically and they are so dependent on their own proprietary trading and on M&A fee activity that I'm not entirely confident that the demographic shift is going to be of huge additional benefit to Goldman Sachs (NYSE:GS), Merrill Lynch (MER), etc. (though I do have some LEAP call options on Goldman Sachs, just in case they're able to keep this growth going).
Or I could invest in one of the smaller regional brokerage/investment advisers. These would include Raymond James (NYSE:RJF), or AG Edwards (AGE). I think these might actually be good buys, and I think AG Edwards is often overlooked as an investment so that's a strong possibility. I just need to get my head around which one of these companies will be able to grow their footprint as well as take advantage of the growing assets of their near-retirement clients.
And finally, I could look at a company that primarily manages mutual funds. There are tons of these as well, and many of them are public. Two that have caught my eye in the past are Legg Mason (NYSE:LM) and Affiliated Managers Group (NYSE:AMG), which is the umbrella holding company for lots of excellent firms like Third Avenue. Most of these companies also manage private accounts in some fashion, and some also offer brokerage services. I think the AMG stable of funds is one of the finest ones in the industry, but I don't like the valuation of the company very much right here.
Legg Mason, however, really appeals to me. Being generally a long term investor, I am very intrigued by the huge fall the shares have had this year for what I consider to be short term problems. They've had several hiccups in integrating their massive asset swap which was the big deal everyone probably heard about when they swapped their brokerage for Citigroup (NYSE:C) asset management business. They've also gotten some negative attention over the past six months as it appears that Bill Miller, their biggest fund managing star, is going to finally lose out to the S&P for the first time in 15 or so years.
LM might still run into trouble as they continue integrating their new funds and clients, and it's possible that a serious market correction could bring prices lower, but at the moment this company is at the top of my list as I search for investments that might benefit from the baby boomer retirement years. I'll let you know if I decide to actually purchase shares.
LM vs. AGE vs. AMG vs. RJF 1-yr chart:
Full Disclosure: I own Berkshire Hathaway and Markel shares, and LEAP call options on Goldman Sachs, and I have money in several Third Avenue mutual funds.