George Robb, chief investment officer, Asset Management Investment Company tells MoneyWeek where he'd put his money now.
It is now some 18 months since the bear market that savaged markets at the beginning of the decade bottomed out. Since then, we have seen a welcome recovery. The FTSE 100 index moved from a low of 3,200 in March 2003 to pass 4,500 in the spring of 2004. The markets then quietened down and were pretty flat all through the summer. However, there are now signs of increasing confidence coming through. It is still a matter of conjecture whether we are in a bull market or a fool's rally in a longer-term bear trend, but after the summer there are signs of greater optimism around and I think that will continue.
So should you invest in the asset-management industry? Clearly, bear markets are not ideal environments for fund-management firms, and this one has been no exception. During the Nineties, making money was easy. Margins were high and launching funds and raising money for them was straightforward stuff - operational gearing was operating strongly in favour of the firms. But the bear market then forced companies in the sector to examine their businesses in detail and, in many cases, to take painful decisions on costs - decisions that, in many cases, would have hurt a lot less had they been taken earlier and in a better environment. And it wasn't just costs that managements looked at: they were also forced to consider the strengths and weaknesses of their businesses as a whole.
As a result of all this, the sector has emerged from the bear market in a much leaner and fitter state to face the challenges and opportunities of the next market cycle. At the same time, it seems likely to me that there is going to be further consolidation in the sector both here and abroad. The challenges of marketing in such a competitive industry - and getting this right is essential to organic growth - are huge, and that makes gathering of assets via mergers or takeovers attractive. This is particularly the case with the smaller firms in the industry: they can become meaningful players considerably faster through a few successful mergers than they could if they were to rely on painstakingly building up their business. For bigger companies, takeovers will continue to be a critical factor in grabbing market share and increasing margins.
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But size isn't everything in this industry. I expect the trend towards specialisation to continue, and it is from the ranks of the boutique managers, offering high performance in their areas of specialisation, that many successes will come. So what should you invest in? On the boutique side, Liontrust (LIO), which has established a fabulous reputation in a short period of time, looks good. But on the more traditional fund-management side, I'd look at two quoted firms that have had a difficult patch but shouldn't be overlooked. These are Amvescap (AVZ), which has been hit by scandal and a hefty fine from US regulators but is still the largest quoted-asset manager in the world, and Aberdeen Asset Management (ADN), which was damaged by the split-capital investment trust issue, yet still has over £21bn under management - including some of the most highly respected emerging markets businesses in the industry. If the markets continue to strengthen, as I think they will, the inherent strengths of these companies will eventually be recognised and their shares will rise accordingly.
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