At the end of 1Q 2013, AUM was up 6% year-over-year to $729 million. Revenue increased 5.2% sequentially, and the adjusted operating margin expanded to 38.4% from the 35.6% in the prior quarter.
Invesco Ltd. (NYSE:IVZ) is also looking to increase its focus on international and emerging markets. Near the end of 3Q 2012, Invesco formed a joint venture (JV) with an Indian asset management firm, Religare Asset Management. Another big key for Invesco is the diversification in its AUM by client base and asset class. At the end of 2012, roughly 30% of Invesco Ltd. (NYSE:IVZ)‘s client AUM was from outside the U.S.
Invesco Ltd. (NYSE:IVZ) does offer investors a solid dividend, one that yields 2.7%, and back in April the company upped its quarterly dividend by 41% over the prior quarter. Since 2009, the company has been increasing its dividend every year. However, with the recent run up in the stock is it too expensive? I think so, but don’t worry; there are other ways to play the rebounding investment-management market.
The comps
Although the recent run up in Invesco might make the stock a bit too expensive from a valuation standpoint, could Invesco Ltd. (NYSE:IVZ)‘s performance be a sign of things to come for its competitors?
From a valuation standpoint, Legg Mason, Inc. (NYSE:LM) is the most expensive. This comes after the investment firm managed to post 1Q EPS of $0.79, which was in-line with consensus estimates. Legg Mason, Inc. (NYSE:LM) is a global asset-management firm focused on proprietary mutual funds and separately-managed accounts (SMAs).
Earlier this year, Legg Mason, Inc. (NYSE:LM) completed the acquisition of London-based fund-of-hedge-fund firm, Fauchier Partners, from BNP Paribas Investment Partners. The acquisition is expected to be accretive to Legg Mason, Inc. (NYSE:LM)‘s earnings in the first year.
Legg Mason, Inc. (NYSE:LM) has been vigorously working on improving its profitability through key initiatives such as innovative product solutions to its client base, tapping sound investment capacities and expanding distribution relationships. After restructuring its debt in 2012, the firm’s interest expenses fell 29% in the first nine months of fiscal 2013 compared to the prior-year period.
Another key competitor, Lazard Ltd (NYSE:LAZ) , utilizes a strategy that includes local and emerging markets in both equities and fixed income. This diversity has helped the company grow AUM to $167 million at the end of 2012, an 18% increase year-over-year.
Lazard Ltd (NYSE:LAZ) managed to post 1Q EPS of $0.28, below the $0.32 consensus estimate, citing lower investment-advisory fees related to delays from its merger and acquisitions backlog. However, despite the under-performance, the company expects its M&A segment to expand over the interim. I think the recent earnings miss might be a great time to buy into the stock.
In late 2012, Lazard Ltd (NYSE:LAZ) announced various cost-saving initiatives, with a target to realize about $125 million in annual savings from its existing cost base. Over the interim, the company expects revenue growth from defined benefit and defined contribution retirement-plan growth in developed economies. Meanwhile, longer-term revenue growth will be from increasing its AUM from Asia, Latin America and the Middle East.
Hedge-fund trade
At year’s end, Invesco had the most hedge fund interest among companies listed, with a total of 23 long the stock. Richard Pzena’s Pzena Investment Management had the most valuable position, worth some $226 million and making up 1.9% of its 13F portfolio. Billionaire Ken Griffin was in second with a $194 million position (check out Griffin’s dividend picks).
In second place was Legg Mason, Inc. (NYSE:LM), with 20 hedge funds long the stock at the end of 2012. Billionaire Nelson Peltz’s Train Partners was the top hedge-fund owner with a $331 million position, making up an impressive 14% of its 13F portfolio (see Peltz’s newest picks).
Although it was a 14% increase from the third quarter, the 14 hedge funds long Lazard Ltd (NYSE:LAZ) were the smallest among the three investment-management companies listed. Top hedge funds included John Rogers’ Ariel Investments and Train Partners, as well, as billionaire Ken Fisher (see which other hedgies were going long).
Don’t be fooled
So which investment management company should investors jump in to? Lazard Ltd (NYSE:LAZ) appears to be one of the best buys from a valuation perspective, while also holding impressive growth prospects. The other key benefit for Lazard shareholders is its 3% dividend yield. Lazard trades at 13.1 times forward earnings compared to Invesco Ltd. (NYSE:IVZ)‘s 13.2 times and Legg Mason’s 14.6 times.
What’s most impressive is analysts’ expectations for future EPS growth: Lazard is expected to grow EPS at an annualized 36% over the next five years compared to Invesco’s 14.7% and Legg Mason’s 16.4%. The outlook for Lazard Ltd (NYSE:LAZ) looks to be solid and I take the recent strong performance by Invesco as a sign of things to come for Lazard.
The article Investing in Investment Managers originally appeared on Fool.com and is written by Marshall Hargrave.
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