Consider the Source: Asset Managers Seen a Better Bet Than Funds

NEW YORK (TheStreet) -- Investors interested in mutual funds should consider the source: the stocks of asset management companies that sell the funds.

After all, these companies are likely to produce much better returns than mutual funds over the long run.

Compare, for example, the S&P 500 with the three largest publicly traded companies that make most of their money from managing assets. While the index has gained 68% over the past decade, BlackRock (BLK) , Franklin Resources (BEN) and T. Rowe Price (TROW) soared 346%, 138% and 168%, respectively.

Expand the horizon to 20 years, and Legg Mason (LM) , the fourth-largest, also easily tops the index's performance, though the three bigger ones did even better during that time. BlackRock gained the most in just 16 years as a public company.

Much of the money management firms' allure is in their business model, which generates returns in good years and bad.

They collect fees on assets under management, and, with some exceptions, the fees generally increase in proportion to asset growth. What makes big better is that an economy of scale funnels much of the increase in fees directly to the firms' bottom line.

Big is also better because the U.S. market is mature, and so size -- in sales, marketing, and advertising -- helps to tap into the global market where there are plenty of opportunities for growth. BlackRock, Franklin Resources and Legg Mason all are well represented in world markets.

Not that it can't be a bumpy ride.

In declining markets, all asset management funds can face a double whammy. As fund prices slide, which in itself would generally reduce management fees, investors often withdraw their money, helping to create a vicious cycle.

Investors should also be aware that the industry is highly regulated and therefore subject to a vast range of legal, political and legislative actions that can affect share prices.

Nor are there necessarily any great values or bargains in this market. All four companies mentioned above have either basically matched or swamped the S&P 500 during the past three years and aren't seen as world beaters in the short run.

For example, Franklin Resources is the only asset manager -- large or small -- recommended by Value Line. Still, it is easy to see any individual investor's 401(k) account being much richer come retirement time for having added shares of BlackRock, by far the biggest of all asset managers, as well as Franklin Resources, to it.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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