Historically speaking, it's been a better bet to invest in an asset managers' stock than to buy its mutual funds. That is to say, owning shares of a mutual fund manager provided returns in excess of the stock and bond markets over time.
One company that leads in terms of total return for investors is T. Rowe Price (NASDAQ:TROW). Just look at its historical performance against the S&P 500 index:
Let's look at three reasons this stock should be on your watchlist.
1. Customers don't leave easily
T. Rowe Price does a great job of making sure its customers stay customers. Roughly 60% of its assets are in retirement accounts and annuities, which means it isn't attracting "hot money" investment capital that will move somewhere else next week. No -- it's building assets in core, long-term investment vehicles, like target-date retirement funds, which generate fees on two levels: once at the target-date fund, and again when the funds are divided among other mutual funds it manages. As of last quarter, it managed $614 billion in client assets.
Customer stickiness is the difference between good and great asset management stocks. T. Rowe Price has a cost advantage in attracting assets over rivals like Ameriprise Financial (NYSE:AMP), which uses a nationwide sales force for direct-to-consumer marketing. That allows it to attract assets without heavy new investment in people or infrastructure. Plus, Ameriprise's model encourages growth with advisers who operate as contractors -- people who may move their clients' funds if better commissions come their way.
2. Its funds have reasonable fees
Active managers take a lot of heat for charging high fees on their clients' accounts. Because of T. Rowe Price's scale, however, it only charges an average annual fee of 0.475% on all assets under management, equal to the average fee on exchange-traded funds and roughly 60% less than the fee charged by the average stock mutual fund. The point is that when clients see T. Rowe's average expense ratio, they don't turn and run to the hills for another active manager. Its fees are lower than the distribution fees alone for Ameriprise funds. At the margin, a company that has lower total fees on assets under management will experience lower client turnover as new, low-cost ETF strategies and other products come to market.
There's also a hidden opportunity in its fixed-income funds. The company waived fees on its money market funds and trusts due to a low interest rate environment. If short-term rates push higher, T. Rowe Price could add as much as $11.9 million to pre-tax quarterly profits by reversing its fee waivers.
3. It's cash-rich
If you simply look at its price-earnings ratio to value T. Rowe Price, you'll miss one of its biggest attributes: tons of liquidity and excess cash. The company reported cash, accounts receivables, and liquid investments of more than $3.1 billion at the end of its last quarter. Its net cash and investments are worth nearly 20% of the market cap after removing all debt and other liabilities. There's a case to be made that T. Rowe Price can and should ramp up share buybacks and its quarterly dividend to slowly wind down its bulging pile of cash.
Other asset managers like Ameriprise Financial have already gone through a buyback phase. Ameriprise cut its share count by 20% since 2010, and there's ample reason to believe T. Rowe Price could follow in the same steps to deliver value for shareholders.
The Foolish bottom line
T. Rowe Price is well positioned in its industry and capable of grabbing more market share even as assets at actively managed funds are in decline. Its connections with 401(k) sponsors and annuity companies give it a mechanism to grow its assets under management without significant marketing expenses.
It's a perfect Foolish stock for the long haul -- a slow and steady growth stock that turns nearly all of its net income into cold hard cash. It won't garner many headlines, but it's a stock long-term thinkers should consider buying.
Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.