2 Under-The-Radar Income Picks In The Financial Sector

The entire financial sector is under scrutiny right now. And understandably so, since a number of high-profile bank failures have investors, citizens, and politicians alike on edge.

In fact, my colleague Jimmy Butts recently made a video answering a question about the banking situation. Namely, he addressed whether the money in your brokerage account is safe. (Short answer, yes.)

But as the saying goes, the time to buy is when there’s blood in the streets.

Today, I want to talk about one of my favorite under-the-radar opportunities in the financial sector: money managers.

Last year was brutal for money managers, as tanking stock and bond prices decimated portfolio values. Making matters worse, clients withdrew assets en masse, shrinking assets under management (AUM) even further.

But amid the rough waters, I spot an opportunity with two well-run shops in particular. Let’s take a look…

1. T Rowe Price (Nasdaq: TROW)

Last year was no exception for TROW. The company suffered $60+ billion in net outflows in 2022, which along with market depreciation, drove assets down by roughly $400 billion to $1.27 trillion.

But it has weathered many of these market storms over the decades, always emerging stronger than before. And cash can flow back in just as quickly as it left. In fact, AUM bounced to $1.35 trillion at the end of January, gaining $20 billion in equity mutual funds alone.

As one of the nation’s largest 401(K) custodians, T. Rowe Price sees an influx of new cash arrive from thousands of clients’ paychecks via automatic payroll withholding each month. And retirement plan assets tend to be sticky.

Regardless of their origin, those hundreds of billions in assets earn steady investment advisory fees day after day, quarter after quarter. It’s a tiny sliver – about fifty cents for every $100 under management. But when you’re measuring by the trillion, it adds up quickly. Even in a nightmarish operating climate, the company still pocketed well over $2 billion in operating income last year.

And it returned nearly all of that to investors via dividends and stock buybacks. Seeing smoother sailing on the horizon, management has just bumped its quarterly distribution once again to $1.22 per share. That means today’s investors can lock in a healthy yield of 4.5%, nearly three times the market norm.

Nearly nine-in-ten (87%) domestic T. Rowe Price stock funds have outrun their category average over the long haul. That type of performance justifies a premium price. Yet, 90% of this fund family has a lower expense ratio than its peer group. Inexpensive fees and top-tier performance is a winning combination — which explains the mountainous pile of assets.

Earnings per share has advanced at an impressive 17% annual pace. Not just over the past 5 or 10 or even 20 years… but for more than 30. And dividends have climbed almost in lockstep, rising 16% per year since 1992.

2. Wisdom Tree (NYSE: WT)

Wisdom Tree just closed the books on fiscal 2022, exiting the year with a record-high $82 billion in assets under management (AUM). It started the fourth quarter with $71 billion, accumulating $11 billion during the period. That 16% growth rate was tops among all publicly traded money managers.

Across the industry, the fourth quarter was a strong finish to an otherwise terrible year. Most mutual fund and ETF managers saw assets bleed away. That’s to be expected when the S&P 500 drops almost 20%, and bonds suffer the steepest decline in decades, taking a sharp bite out of equity and fixed-income portfolio values.

T Rowe Price (Nasdaq: TROW), one of the better-run shops, started 2022 with $1.69 trillion in AUM and finished with $1.27 trillion, losing $413 billion to market depreciation and client outflows. The latter accounted for more than $60 billion.

Wisdom Tree certainly wasn’t immune to these headwinds. But its clients stood their ground. Rather than yank funds away, they continued to send in more. On a net basis (deposits less withdrawals), the company reported positive inflows of $1.3 billion in the first quarter, $3.9 billion in the second, $1.7 billion in the third, and $5.3 billion in the fourth.

That’s $12+ billion in net inflows – in the teeth of a bear market.

And the momentum continues. Through the first two months 2023, Wisdom Tree has already gathered another $4.3 billion. That puts it on track for a tenth consecutive quarter of positive net inflows.

Keep in mind every dollar of AUM earns about half a penny (0.40%) in advisory fees. The current $87 billion (assuming zero inflows or appreciation) will generate about $350 million in fees this year.

Action to Take

There is a reason why I classify TROW as a Lifetime Wealth Generator over at High-Yield Investing. The stock has delivered annualized total returns of 19% over the past 30 years, effectively doubling shareholders’ money every four years on average.

I can’t guarantee that same return going forward. But I do believe this cash-generating business will continue to produce market-beating returns for investors, particularly at this discounted valuation. It certainly doesn’t hurt that there is zero debt on the books, against a couple billion in cash and equivalents.

Meanwhile, Wisdom Tree has posted its strongest organic growth since 2015 and has raked in positive domestic inflows in 30 of the past 31 quarters. And it continues to push into alternative investment frontiers (like blockchain finance and digital tokenized assets) that are stackable on top of its existing business.

While the 2% dividend may not be much to write home about, WT remains a very attractive acquisition target for traditional active money managers (like T. Rowe Price) seeking new growth avenues.

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