Finding Bargains Among Investment Managers

(MoneyWatch)  When the markets are volatile and most people are hesitant to invest, here's one solution: Invest in investment managers. That's the advice of Blaze Tankersley, chief market strategist of the institutional brokerage Bay Crest Partners.

A bear market takes a greater toll on investment firms than on many other companies. Income for managers of mainstream stock and bond funds is generated by fees based on a small percentage of assets in their care, while hedge funds and specialists in such niches as distressed debt and private equity typically earn additional fees if their returns exceed certain benchmarks.

Both of those revenue sources have shriveled due to weak performance and vanishing clients, so it's no wonder their shares have been pounded. But Tankersley contends that they have gone from overvalued to fairly valued to way too cheap.

The selling cannot be justified by any reasonable assessment of their business prospects, in his view, and he predicts that investors will soon see the error of their ways and begin bidding the shares up.

"These stocks still offer tremendous value when you consider that the franchises have been around for a long time," Tankersley told me. "You're going to start to see that although these guys have lost a tremendous amount of their asset bases, they're being given up for dead as if the franchises are worthless, and that's not the case. I don't think anyone is looking at them and thinking, 'We should go long.' "

He may be a cult of one, judging by declines in the sector. High-profile names, including Blackstone Group, Calamos Asset Management, Pzena Investment Management and Och-Ziff Capital Management experienced losses of more than 90 percent from their peaks two or three years ago.

Pzena's stock has been "cremated," Tankersley said. "If you're looking for value, here's a spot where you can find it." Continuing with the suitably morbid terminology, he described Calamos as "a wonderful company with smart people that has just been given up for dead."

These four and more mainstream firms like AllianceBernstein Holding and T. Rowe Price -- the "Cadillac of the group," as he called it -- give investors "a cheap, easy backdoor way to play the equity rally," should it continue, he said.

So far, so good. Asset managers have soared during the recent rebound in the broad averages, led by Blackstone, which doubled.

Tankersley makes a compelling case, but he could be wrong, of course. The market rebound has carried investment firms higher, and if it runs out of steam, these stocks could lead the way back down.
As much as he likes them, Tankersley would like them better if they were cheaper. Even though they remain well below all-time highs, he said he prefers to wait for a pullback before purchasing shares in some of the bigger winners.
He has no qualms about recommending them at these levels to long-term investors, however, and he highlighted a factor that could make the outlook for some of his selections especially promising now: When the government arranges the sale of tens of billions of dollars of so-called toxic assets, Blackstone, Calamos and others are likely to get a piece of the action, making the assets not so toxic for them.
"You have to take a cynical approach, or maybe a realistic, capitalistic approach, to the near-collapse of the financial system," he remarked. "A lot of people have suffered and that's bad, but at the end of the day someone's going to make money off that."