Federated Investors (NYSE: FII) this week announced strong second-quarter results, which tracked the generally solid performance that other asset management companies have been reporting. Given recent volatility in equity and bond markets, investors may wonder about the company's ability to continue to attract client funds and increase revenue.
Assets under management reached a record $260 billion at the end of Federated's second quarter, a 23% increase from the previous year. That growth was the result of both the acquisition of an equity manager and net investment inflows. Federated reported equity funds under management of $43 billion at the end of the quarter, another record and a 42% increase over the previous year.
Revenue was $276.5 million, a 17% increase. Operating expenses also grew by 17%, largely the result of higher marketing and distribution expenditures and increased expenses related to an acquisition. Income from continuing operations was $55.3 million, an 18% increase over the $46.7 million earned in the second quarter of 2006. Earnings per share increased to $0.54, a 23% increase from the previous year. At its recent share price around $37, Federated stock trades at about 19 times earnings.
Federated stands apart from other publicly traded asset management firms. Giants like BlackRock (NYSE: BLK) and Legg Mason (NYSE: LM) each manage approximately $1 trillion in assets, dwarfing the relatively small Federated. AllianceBernstein (NYSE: AB) boasts a product lineup and distribution system that provides a unique international orientation. T. Rowe Price (Nasdaq: TROW) has a reputation as a successful manager of no-load equity funds. Size, breadth of products, and strength in equity funds can all confer important competitive advantages to asset management firms by enhancing operating leverage, providing a more stable pool of investment funds, and delivering wider profit margins. As a consequence of having such advantages, most asset management peers have historically traded at richer price multiples than the Pittsburgh-based Federated has.
Federated has been trying to develop some of these same competitive advantages. In particular, the firm has been expanding its offerings of equity products, in part through strategic acquisitions. With more than $193 billion of assets under management in money market funds, however, Federated's identity is still very much associated with a low-margin corner of the asset management industry. Given recent volatility in equity and bond markets, as well as attractive short-term interest rates, investors might consider Federated's unique franchise to be well suited to the current investment climate.
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Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the securities of any of the companies mentioned in this article. The Fool has a disclosure policy.
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