Cohen & Steers, Inc. (NYSE:CNS) reported decent earnings in the second quarter, but the news that caught investor attention was the sequential quarter drop in assets under management. It shouldn’t have been a surprise from a real estate focused shop.
The company was founded by real estate investment trust (REIT) specialists Robert Steers and Martin Cohen when the asset class was broadly misunderstood and largely relegated to mom and pop investors. As the REIT sector has grown, the company has gone along for the ride.
Like many one-time specialists, however, Cohen & Steers, Inc. (NYSE:CNS) has found that it needs to broaden away from its core to keep growing. That’s led it to expand its offerings, though not too far from its core. For example, it recently launched a closed-end fund that invests in limited partnerships, another income generating pass through asset class. Still, around 70% of its assets under management (AUM) is focused on real estate in some way.
The company closed out 2012 with almost $46 billion in assets under management. That number increased to $49.3 billion by the end of the first quarter, but fell 3% in the second quarter, ending the period at $47.8 billion. Depreciation of about $1 billion and outflows of around $450 million were the reasons for the fall.
And that’s the problem that the company faced in the second quarter. Not only are investors concerned about REITs as an investment, but REITs as an asset class sold off because of interest rate fears. Cohen & Steers, Inc. (NYSE:CNS)put up solid numbers in the second quarter, earning $0.34 a share, only down a couple of pennies from the previous year.
However, if AUM continue to fall, the business could quickly see top- and bottom-line weakness. Investors concerned about REITs should definitely stay away from Cohen & Steers, Inc. (NYSE:CNS).
Another Focused Asset Manager
Calamos Asset Management, Inc (NASDAQ:CLMS) was founded by John Calamos Sr. to focus on convertible bonds, another misunderstood asset class. These securities are an unusual mixture of a bond and an equity. They can offer the downside protection of a bond with the upside potential of a stock. Although that sounds like the best of both worlds, the asset class is very small, pretty complex, and it’s hard for individual investors to participate.
Like Cohen & Steers, Inc. (NYSE:CNS), Calamos Asset Management, Inc (NASDAQ:CLMS) has been expanding its portfolio offerings, pushing into high-yield debt and equities. At the start of 2013, the company had $30.6 billion in AUM. That number fell to $29.3 billion by the end of the first quarter and was down from $36.2 billion at the end of the first quarter in 2012.
The first-quarter drop in AUM was a mixture of $2.5 billion of outflows offset by market appreciation of $1.2 billion. Investors clearly have soured on the company’s products. However, if the market heads south, too, Calamos Asset Management, Inc (NASDAQ:CLMS) could see a double hit. Since investors are already pulling money out, an increased pace of withdrawals could also be in the cards.
This is another asset management specialist that investors need to watch closely or just simply avoid. It’s particularly notable that first quarter earnings of about $0.15 a share were over 50% below the year ago period.
The Contrast
BlackRock Kelso Capital Corp. (NYSE:BLK) is among the largest asset management companies in the world. It’s been growing through acquisition, including the purchase of exchange traded fund shop iShares. At the start of 2013 the company had over $3.75 trillion under management. It was split pretty evenly between stocks and bonds. That number increased to $3.9 trillion at the end of the first quarter, but fell to $3.85 trillion at the end of the second quarter.
Note, however, that the ups and downs here are small compared to what’s going on at Cohen & Steers, Inc. (NYSE:CNS) and Calamos Asset Management, Inc (NASDAQ:CLMS). Size and diversification are the main benefits that drive Blackrock Kelso Capital Corp. (NASDAQ:BKCC)’s relative AUM stability. Although a broad market sell off would hurt the company, it would likely be a bigger drag on the other pair. Moreover, BlackRock’s earnings were up an impressive 35% year over year compared to relatively weak showing at Calamos and Cohen & Steers.
Be Careful What You Buy
Investors looking for an asset manager need to look deeply at what they are buying. It might be nice to own a “specialist,” but that increases the list of risks you face to include the popularity and performance of the niche in which the company operates. Cohen & Steers, Inc. (NYSE:CNS) and Calamos Asset Management, Inc (NASDAQ:CLMS) have impressive histories, but they can’t escape that dynamic. You should stay on the sidelines unless you are willing to do the extra legwork. Blackrock Kelso Capital Corp. (NASDAQ:BKCC), with its broadly diversified product portfolio and massive size, is probably a better option for most.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends BlackRock.
The article The Risk Of Being A Niche Asset Shop originally appeared on Fool.com.
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