Barron's Interview: The Top Publicly Traded Mutual Fund Providers for 2007

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INTERVIEW: Fund Firms: Picks of the Pickers by Lawrence C. Strauss

Highlighted companies: Franklin Resources Inc. (BEN), AllianceBernstein Holding LP (AB), T. Rowe Price Group Inc. (TROW), John Nuveen Company (JNC), Legg Mason Inc. (LM), Janus Capital Group Inc. (JNS), Federated Investors Inc. (FII), Cohen & Steers Inc. (CNS)
Summary: Barron's interviews Merrill Lynch fund analysts Cynthia Mayer and Guy Moszkowski, soliciting their views on publicly traded mutual fund providers. Key points and companies:

• 30% of U.S. active equity funds were ahead of the S&P 500 index, vs. 65% in 2005. When active managers have trouble outperforming, assets may start flowing to alternatives like index products, ETFs and hedge funds. But the downturn would have to last long enough for 3-5 year track records to be affected.
• Asked if ETFs, whose assets are tiny compared with the fund industry's, pose a long-term threat, they said: If you look at the combination of exchange-traded funds and index products, it is clear that they are eating into the active-management base in mutual funds.
• Growth will likely be faster in asset management outside the U.S., so funds with the best access to those markets will grow faster, specifically Franklin Resources Inc. (BEN) and AllianceBernstein Holding LP (AB). This makes these two companies are the most attractive in the industry.
• The Pension Reform Act has made it easier for companies to automatically enroll employees in 401(k) plans, and to put that money into equities. This should benefit funds that do a lot of 401(k) business, such as T. Rowe Price Group Inc. (TROW) -- although at 20x 2007 earnings there's not much value left in TROW.
• John Nuveen Company (JNC) is very stable. With 50% of its assets in equity funds, it's a good long-term play on the demand for income-oriented investments, and it's a very good cash-flow generator. Its 18.7x P/E ratio is low for an industry leader. And a high proportion of its assets are in "Roach Motel" closed-end funds, so named because they're not subject to outflows -- money comes in but never goes out.
• Legg Mason Inc. (LM) has clearly had issues integrating former Citigroup assets, and has missed forecasts twice. But most of its difficulties are no more than an "accident of timing" -- a cold streak when multiple strategies underperformed simultaneously. Overall, there is still distribution potential; but it may take a little longer to exploit than people expect.
• Janus Capital Group Inc. (JNS) has been improving performance for the last 3.5 years, yet asset flows have barely picked up. Investors and financial advisors still have lingering doubts -- it's going to take time.
• Federated Investors Inc. (FII) has 75% of its assets in money funds. To provoke real growth in such a business, the fear/greed pendulum has to swing over to fear. If the Fed lowers rates, there would be a rush of money into institutional money-market funds -- but there are a lot of players waiting for such money.
• REIT holder Cohen & Steers Inc. (CNS) should be able to weather a real estate downturn: commercial real estate remains strong, countries continue to adopt the REIT structure, and investors are gaining a better appreciation of carrying REITs in their portfolios.

Related: Asset Class Investing: A Strategy For Both Bull and Bear Markets. Ten ETF Trends To Expect In 2007, Getting to the Right Level of Portfolio Risk, Assessing Mutual Fund Performance When It Matters Most