DOW BOMB HIT FUND STOCKS MONTHS AGO

Long before the broader market got whacked last week, many investment management stocks were feeling the pain.

Shares in a host of firms — from Pimco Advisors Holdings LP, Alliance Capital Management LP, Amvescap PLC and Pioneer Group Inc., to manager holding companies like Nvest LP, Liberty Financial Cos. Inc. and United Asset Management Corp. — had been trailing the Standard & Poor’s 500 stock index since at least mid-June.

What’s more, the mergers and acquisitions market for money managers apparently had cooled off as well, with once-hot properties like Kaufmann Fund sponsor Edgemont Asset Management Corp. and Societe Generale Asset Management Corp. continuing to sit on the block. Even aspiring asset management combines such as Value Asset Management Inc., Cypress Holding Co. and Matrix Global Investments Inc. haven’t announced acquisitions in months.

So is the investment management sector an emerging indicator for market prognosticators?

Not likely, says Marshall Front, 61, managing director of Trees Front Associates Inc., a Chicago firm managing $1.3 billion in stocks and fixedincome securities. “They are more likely to be coincidental indicators” than predictors of where the market is headed, he says.

Though Mr. Front and other market watchers attribute the drop-off of investment management stocks to the broader underperformance of small- and mid-cap stocks, there is growing concern over the inability of active stockpickers to beat or at least to keep pace with benchmarks like the S&P 500.

“It raises the question of what value managers have when investors could do better buying an index fund with lower fees,” says Mr. Front.

holding-the-bag companies?

The sector’s stocks also have been weighted down by the money manager holding companies, whose long-term prospects are uncertain. “Norton Reamer’s experience doesn’t bode well,” says Mr. Front, referring to United Asset Management’s chief executive. “You can’t let all these horses run wild. Now he’s come back and is trying to ride herd on them.”

And at least some of the price pressure on the asset management stocks has come from disappointing earnings reports from Franklin Resources Inc. and T. Rowe Price Associates Inc. Last week, Pioneer shares brushed against a 12-month low when the company suspended its dividend after a $12.1 million second-quarter loss.

Has the rapid discounting of investment management stocks been justified?

“When people value asset management firms, there is an expectation that whenever the market goes up or down these firms are either going to benefit or suffer,” says Neal Epstein, a vice president of equity research in New York with Putnam Lovell de Guardiola & Thornton. The firm’s market capitalization-weighted index of 18 publicly traded asset management stocks dropped 3.8% over the last two months vs. a 1.7% drop for the S&P 500 index.

Some companies, like SunAmerica Inc. and Nationwide Financial Services Inc. — with an emphasis on more predictable money flows from retirement investments — managed to avoid the market pullback and continue to trade ahead of the S&P.

Despite the big price movements, it’s clear the companies’ fundamentals don’t change as quickly as the market.

Mr. Epstein says the gradual nature of asset flows into or out of money managers has a stabilizing influence on companies’ earnings. “This phenomenon is underappreciated, given the visibility and the drama of daily price movements in the broad market,” he says.

If last week’s selloff continues, asset managers with highly focused product lines in riskier asset classes could be the most vulnerable. In that category are firms like small-cap stock picker Edgemont; Kansas City Southern Industries’ Janus Capital Corp., which favors large-cap growth stocks; and the already troubled growth-momentum manager Pilgrim Baxter & Associates, a UAM affiliate.

“Funds like the Janus 20 have been great because the tier of the market they invest in has led the market,” says Mr. Epstein. “The $64,000 question is what happens when and if the price-earnings ratio for large-cap growth stocks goes from 50 to 30. All analysts have been arguing that the market is too narrow, and Janus is highly invested in that narrow, select end of the market.”

Mr. Epstein sees more value in companies like Pimco and Alliance, whose stock is trading 15.6% and 22.4% under their respective 12-month highs. “Alliance has done well on international distribution, and their domestic performance is strong on both the institutional and mutual fund sides,” he says. “They’ve also come up with new ways of distributing their management skills by creating hedge funds.”

Likewise, Mr. Epstein says the current market environment already favors companies like Pimco, whose strength is in fixed-income management. Investors poured $6 billion into the Newport Beach, Calif., company’s mutual funds during the first six months of this year, more than any other publicly traded asset manager, according to Financial Research Corp. in Boston.

not yet a value

Asset management stocks haven’t yet fallen far enough to attract value managers like David Dreman. Except for maintaining a small position in Baltimore money manager T. Rowe Price, Mr. Dreman is shopping elsewhere in financial services. He sees bargains among regional bank stocks battered during last week’s market drop. The most attractive casualties: First Chicago NBD Corp., PNC Bank Corp. and Bankers Trust New York Corp. All were trading at 13 to 15 times their trailing 12-month earnings late last week; the average financial services multiple is 22, says Mr. Dreman.

“First Chicago has been blown out of the water,” he says, because of the perception its prospective partner, Banc One Corp., has had trouble digesting earlier acquisitions. Though its stock is down nearly 24%, Mr. Dreman adds, “First Chicago still has excellent earnings, strong businesses and at 14.6 times earnings, is very cheap.”