MARKET COMMENT
Fund Managers Going Cheap

By Maynard Paton (TMFMayn)
December 3, 2003

Their products may not be Foolish, but fund management companies could now make for rewarding investments. They're the definitive 'geared play on the market' and if the bear has been beaten, a collection of fund managers should do well over time.

Another attraction is the recent investigation into the market timing of US mutual funds. The scandal has blown a cloud over the sector, yet it may provide good opportunities for the canny contrarian. In fact, an interesting situation is developing at Amvescap (LSE: AVZ)(NYSE: AVZ), which today confirmed it was facing charges based on alleged market timing activities. 

At 395p, Amvescap shares stand on a forward price to earnings ratio of 17 and offer a 2.9% dividend yield. On these shorthand measures, there's no obvious value. However, with annual profits very sensitive to the year-to-year performance of the stock market, investment groups are often valued as a proportion of their more stable funds under management (FUM) figure. The general rule of thumb says market capitalisations should be no more than 5% of FUM.

Valued at £3.1b and with £208b of funds at the end of September, Amvescap is currently worth 1.5% of its FUM, which looks cheap. Though the 'asset quality' may differ, the valuation compares well with the £210m Barclays (LSE: BARC)(NYSE: BCS) paid for stockbrokers Gerrard -- or 1.7% of the acquired £12.5b FUM -- in October.

These ratings are in stark contrast to Man (LSE: EMG) though. At 1,460p a share, the hedge fund manager is worth £4.5b, or a stratospheric 23% of its £18.9b FUM. Though Man reported its FUM increasing by an amazing 21% in the last six months, history has shown few, if any, fund managers can outperform by such a margin in the long term. Amvescap and other downtrodden fund managers will surely prove better investments from here.

More: US Fund Scandal Hits The UK | Profit From A Market Recovery | Amvescap Company News