The market's October swoon may have already caused investors to forget the third-quarter rally. If so, this week's earnings reports from asset managers should jog their memories, even if valuation concerns keep a lid on share prices.

"Average assets under management rose last quarter, and that's how the group makes its money, so you should see some strong performances," says Matt Snowling, analyst at Friedman Billings Ramsey. "We won't see the effects of the recent market pullback until next quarter."

For the benefit of those traders whose memories have taken a pounding along with their positions since the start of this month, the S&P 500 and the Russell 2000 indices were up 3.1% and 4.4%, respectively, from July through September. The Nasdaq Composite rose 4.6% over that time.

In turn, the average diversified U.S. equity fund was up 4.7%, according to Lipper, a healthy return that has forced a number of analysts to up their earnings estimates for the likes of Alliance Capital Management ( AC), T. Rowe Price ( TROW) and even beleaguered Janus Capital ( JNS) in recent weeks.

Analysts have had to ratchet up their estimates even more for asset managers with strong international fund offerings, such as Franklin Resources ( BEN), after another strong performance by stocks overseas. The average non-U.S. fund was up 11% last quarter, with the average emerging markets fund up 17%.

"U.S. money is looking for an alternative," says Snowling. "And when it comes to distribution, Franklin is second to none."

Franklin reported September ending assets under management of $452.4 billion, up 6.3% over the prior quarter. The San Mateo, Calif., company releases fourth-quarter earnings Thursday, and analysts surveyed by Thomson First Call will be looking for a profit of $1.02 a share on sales of $758 million. A year earlier, the company earned 79 cents a share and had sales of $882 million.

The excess dollars flowing into Franklin's funds may bode well for a strong quarter, but there is a growing fear that the good news may already be baked into a stock that trades in line with the group around 18 times 2006 EPS.

Not to worry, says Fox-Pitt Kelton analyst David Haas, who believes near-term upside in BEN shares may be reduced, but says the company is still a good value on a risk/reward basis.

"While shares of Franklin have risen more than the rest of the group over the past 12 months, there are still a few catalysts to move the stock higher, including the repatriation of foreign-based earnings and the strong secular shifts toward international equity and hybrid products," says Haas.

Haas calls his other top pick, Legg Mason ( LM), "a company in transition" as it waits until December to close the asset swap it made with Citigroup ( C), first announced in June. Under the terms of the deal, Legg will acquire Citi's asset management business, while Citigroup will grab Legg Mason's brokerage business and a 14.4% stake in the Baltimore asset manager. Upon completion of the deal, Legg will become the No. 5 asset manager in terms of size, with assets of $850 billion.

Even in its transitory phase, Haas is still looking for Legg to beat the analysts' mean earnings-per-share estimate of 96 cents, up from the 81 cents a share the company earned a year earlier.

Robert Lee, an analyst at Keefe Bruyette & Woods, sees valuation as a potential problem weighing on shares of T. Rowe Price, which is scheduled to report third-quarter earnings Wednesday.

Analysts surveyed by First Call are looking for a profit of 82 cents a share and sales of $384 million. For last year's third quarter, T. Rowe posted earnings of 62 cents on sales of $316 million.

Lee recently raised his price target on T. Rowe to $68 based on increased earnings and cash flow; nevertheless, he maintained a "market perform" rating on the stock, believing the "positive outlook is already reflected in the stock," which is trading in the low $60 range.

Lee is also maintaining his rating on Alliance Capital ahead of its earnings release Wednesday. The company has already reported third-quarter assets under management of $555 billion, up 7.5% over its second quarter.

Analysts polled by First Call project Alliance will post a profit of 67 cents a unit and sales of $761 million. A year ago, the company earned 52 cents a share and had sales of $719 million.

Janus Capital also will be reporting Wednesday. Analysts expect the Denver-based asset manager to earn 13 cents a share on sales of $228 million, a drop from last year, when the company earned 15 cents a share on revenue of $238 million.

Mark Lane, a William Blair analyst, says part of Janus' problem is that fund flows continue to be concentrated into the best performers like international funds, an area where Janus only has 10% to 12% of assets, and away from growth funds, which are still Janus' best-known products.

Lane expects modestly negative outflows of up to $1 billion at Janus, with institutional inflows into INTECH, its quant-based investment subsidiary, stemming the tide of dollars outward.

"INTECH inflows were $6 billion in the first half. They now have $32 billion in assets with a capacity of $50 billion," says Lane. "But still, this is only 20% of Janus' $130 billion in total AUM."

Lane also says Janus' valuation remains rich at 24.5 times 2006 EPS estimates, which is about a 40% premium to its asset management peer group.

For those speculators holding onto Janus as a take-out play, Lane says any buyer better be strongly bullish on growth investing to buy at the current price.

"We believe that a buyer would have to hold a strong position that growth equities are poised for a major rebound after several years of relative underperformance to justify buying at the current valuation," says Lane.

Last week, BlackRock ( BLK) and Nuveen ( JNC) kicked off asset managers' earnings reports, with each reporting profits that topped analysts' estimates.

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