Higher earnings in store for asset managers, FBR Capital Markets says

Asset management firms will experience higher earnings than expected following the recent market rally, according to research released from FBR Capital Markets Corp. of Arlington, Va.

The firm raised its 2009 and 2010 earnings-per-share estimates on average by 7% and 6%, respectively, for the 12 publicly traded asset management firms that it covers.

The changes in outlook are largely due to current market performance, according to the report.

Among the firms covered in the research are Franklin Resources Inc. of San Mateo, Calif., Federated Investors Inc. of Pittsburgh, and T. Rowe Price Group Inc and Legg Mason Inc., both of Baltimore. Equity mutual funds on average posted a return of 16% year-to-date as of May 26 and fixed-income funds had an average return of 2%.

At the same time, the Standard & Poor’s 500 stock index returned 14.1%.

“Our forecasts now assume that industry revenues decline 28% sequentially in 2009 before rebounding 5% in 2010,” according to the report.

While assets under management rose during the current quarter, the firm expects operating leverage to be muted as companies have been under-spending, the report said.

The estimate reflects the expectation of an increase in expenses in the areas of compensation, marketing and technology.

“Most companies reduced or delayed investment projects and temporarily underspent on compensation and branding to help weather the economic storm,” the report said.

“Now with the recent market rally providing some much needed revenue relief, we expect expense levels to rise.”

As a result, operating margins will expand by a modest 1.4% on average, the report said.

FBR had $1.2 billion in assets under management as of March 31.