Why? A confluence of factors. World financial markets are becoming more integrated and financial wealth is rising with the economy. The expansionary monetary policies of world central banks has helped fuel this.
The asset management and investment services sub-sector grew at an annual rate of 8%, compared to 5% per year for the finance, insurance, and real estate industry from 1997 to 2013. Asset management and investment services are small components of the sector, about 5% of the financial industry, in terms of sector GDP. Asset management and investment services sub-sector, however, is more cyclical than the overall financial sector. It declined more than the overall financial sector in the last recession, making the companies that operate in asset management and investor services sub-sector more risky.
So what are the best asset management and custody banks investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which asset management and custody banks made the list. And when you're done, be sure to read about which biotech companies to buy now. Year-to-date returns are based on May 26, 2015, closing prices. The highest-rated stock appears last.SEIC data by YCharts
3. SEI Investments Co. (SEIC)
Market Cap: $7.8 billion
Year-to-date return: 17.3%
SEI Investments Co. is a publicly owned investment manager. The firm provides wealth management and investment advisory services to its clients through its subsidiaries.
"We rate SEI INVESTMENTS CO (SEIC) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, impressive record of earnings per share growth, increase in net income and good cash flow from operations. We feel its strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- SEIC's revenue growth has slightly outpaced the industry average of 5.6%. Since the same quarter one year prior, revenues slightly increased by 7.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Capital Markets industry and the overall market, SEI INVESTMENTS CO's return on equity significantly exceeds that of both the industry average and the S&P 500.
- SEI INVESTMENTS CO has improved earnings per share by 16.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, SEI INVESTMENTS CO increased its bottom line by earning $1.85 versus $1.63 in the prior year. This year, the market expects an improvement in earnings ($2.10 versus $1.85).
- The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Capital Markets industry average. The net income increased by 13.1% when compared to the same quarter one year prior, going from $74.82 million to $84.61 million.
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 49.96% over the past year, a rise that has exceeded that of the S&P 500 Index. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: SEIC Ratings Report