A new report from Jefferies points to the fact that history tells us rising rates will mean fixed income outflows. That may hurt some financial services stocks that have the most fixed income exposure, while others may benefit. The Jefferies team points to four stocks that should prosper in the rising rate environment, and all are rated Buy.
Affiliated Managers Group
This company reported outstanding first-quarter earnings, and the rest of the year looks solid as well. Affiliated Managers Group Inc. (NYSE: AMG) is a global asset management company that invests in boutique investment management firms called “affiliates.” These affiliates’ performance drives AMG’s own performance. AMG acts as a fund of funds for these entities.
The company also assists its affiliates in strategic matters, marketing, distribution, product development and operations. AMG holds equity stakes in its affiliates, along with the independent management, which is responsible for deployment of the funds and generating returns. The affiliates are identified based on their growth potential, with products focusing on global equities, emerging market equities and alternatives. AMG manages three distribution channels through its affiliates.
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With just over 10% fixed income exposure, the company is one of the least exposed in terms of assets under management, and the most levered to equity. That is fine in a rising interest rate environment, but it could prove a touch more volatile in a wicked market sell-off or an extended bear market.
The Jefferies price target for the stock is $248. The Thomson/First Call consensus price target is higher at $263.38. The stock closed on Friday at $222.40 a share.
Invesco
This financial services leader has strong positions in both equity exchange traded funds (ETFs) and actively managed equity and debt mutual funds. Invesco Ltd. (NYSE: IVZ) looks to be very well-positioned to capitalize on inflows into both segments, as well as higher asset prices as many on Wall Street see a continuation of the six-year bull market.
Invesco PowerShares is the boutique investment management firm that manages a family of ETFs. The company has been part of Invesco, which markets the PowerShares product, since 2006. The incredible growth and popularity of the product is why many on Wall Street remain so bullish on the stock. The Jefferies analysts see the company as one that is best positioned to compete for share given mix, product offerings and attractive relative performance.
Invesco investors are paid a 2.66% dividend. The Jefferies price target is $46. The consensus target is $46.93, and the shares closed Friday at $40.54.
Janus Capital
This company was one of the poster boys for high-flying 1990s mutual funds, and after the tech crash of 2000 and 2001 the company lost a ton of assets. Janus Capital Group Inc. (NYSE: JNS) scored a big coup in luring famed fixed income manager Bill Gross to the company after his less than friendly departure from the company he founded, Pimco. Gross has investing stature that drew an immediate influx of assets to the company and put it back in the game from a recognition standpoint.
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The Jefferies team also think the company is set with the right product mix, decent performance and, of course, the cache of having a legend like Gross join the firm.
Janus Capital investors are paid a 2.05% dividend. The Jefferies price objective is $21, and the consensus target is $20.07. The stock closed Friday at $17.56.
WisdomTree Investments
This company is the real up-and-comer in the ETF business, and it is carving itself out an outstanding share with many specialized ETF offerings. Wisdom Tree Investment Inc. (NASDAQ: WETF) continues to benefit from the movement toward ETFs. This is especially true with the specialized currency hedged products, with the potential for significant uptake in interest rate hedged products.
Wisdom Tree is run by Jonathan Steinberg, the son of famous Wall Street financier Saul Steinberg. He is also married to Maria Bartiromo, who became very famous on CNBC and now works for the Fox Business Network. Steinberg has a long and very distinguished ETF background, going back to the products infancy.
Wisdom Tree investors are paid a 1.72% divided. The Jefferies price target is posted at $23, and the consensus figure is at $24.25. Shares closed Friday at $18.51.
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With less exposure to fixed income products and markets, all these stocks may fare better in a rising interest rate environment. Again, the equity exposure could be a headwind should the markets turn nasty.
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