Schwab ahead of the pack

Despite the economic downturn and the credit crisis, The Charles Schwab Corp. performed well in the first quarter, and Wall Street is taking notice.

While the San Francisco-based discount broker posted eye-popping asset gains through March 31 relative to its competitors, many Wall Street analysts are apparently suspicious that there might be more to the story in light of the blowup related to its YieldPlus Fund (InvestmentNews, March 31).

Schwab reported that it gained $41.3 billion in net new assets. The figure includes $19.9 billion in assets from Schwab Institutional, meaning that nearly 50% of net new assets came from registered investment advisers.

This compares with the combined $14.4 billion of all the wirehouses that published results for the quarter ended March 31. Those wirehouses are Smith Barney, Merrill Lynch & Co. Inc. and Morgan Stanley, all of New York.

“If there is a secret, it is just the simplicity of the strategy that we have been talking about and continue to execute on,” Walter W. Bettinger II, Schwab’s chief operating officer, said in answering a question during an April 17 analyst conference.

“If you do the right thing by clients in all cycles, they will reward you by choosing on their own to do more business with you,” he added.

Because many big brokers and big banks are in turmoil due to the credit crisis, Charles M. Schwab, chairman and chief executive, said he believes that most of them are not currently much of a threat to compete for client assets with Schwab.

He also said that some discount brokers “are going through difficult times and are trying to come through with our model as such, but some [are] not so successful at it.”

Yet Fidelity Investments of Boston posted its own gain of $41.3 billion of net new assets, including $14.6 billion through RIAs who use its custody services, according to its first-quarter filing with the Securities and Exchange Commission.

The secret to Fidelity’s success “is the strength and stability of our business model and our parent company,” said company spokesman Steve Austin.

Meanwhile, analysts expressed relief that Schwab is weathering the credit crisis.

Michael Vinciquerra, an Atlanta-based managing director with BMO Capital Markets Corp. of Toronto raised his rating of Schwab’s stock (SCHW) to “buy” following an April 17 analysts meeting after he was assured that Schwab had dodged the worst effects of the credit crisis.

“The company’s [YieldPlus Fund], which has lost nearly one-third of its value, affected a small segment of the firm’s customer base, and management didn’t indicate it felt the performance would have much impact on the company or its reputation,” he wrote in his report.

David Trone, research analyst with Fox-Pitt Kelton Cochrane Caronia Waller (USA) LLC of New York expressed a similar sense of relief after the April 17 meeting.

“[Schwab’s] business update helped soothe investor concerns over mortgage and [structured-investment-vehicle] exposures,” he wrote in his report following the conference.

The stock price itself has been soothing, said Jim Ferrare, executive vice president and portfolio manager with Pinnacle Associates Ltd. in New York, which manages $5 billion.

“If you look at all the [other] asset managers on Wall Street, this stock has held up unbelievably well” at about $22, he said.

Schwab’s shares are being aided by the company’s ability to deliver more than promised, wrote Michael Mayo, New York-based research analyst for Deutsche Bank AG of Frankfurt, Germany. “[Schwab] is ahead of target net new assets of $145 billion in 2008 having already reported $41 billion,” he wrote April 18. “This could be an opportune time for Schwab to gain market share.”

But the nature of those gains is even more impressive for their diversity, wrote Lauren Smith, a research analyst with Keefe Bruyette & Woods Inc. of New York.

“Market share gain is across the board and not from any single competitor,” she wrote in an April 18 report.

Wirehouses are one set of competitor relinquishing assets — and employees — to Schwab, Brian Beddell, research analyst for Merrill Lynch, wrote in his April 18 report.

“The RIA segment should be a key driver of growth as more full-service brokers convert to independent RIAs,” he wrote.

And more RIAs means more profits for Schwab, Ms. Smith added.

“Schwab Institutional is the firm’s highest-margin business, reporting about 30% of profits, and [it’s] where we would look for future growth,” she said.

Spokesman Alexander Samuelson declined to comment on behalf of Smith Barney.

Morgan Stanley did not return phone calls and e-mails by press time.

E-mail Brooke Southall at [email protected].