NEW YORK -- The shares of public money managers in the U.S. and Canada trailed stock market indexes last year, according to year-end analysis from Cambridge International Partners Inc., New York.
The Cambridge Index of U.S. Investment Managers, a weighted average of investment management company stock prices, underperformed by 3.7 percentage points the Standard & Poor's 500 index ex-dividends return of 19.5% for the year ended Dec. 31.
Publicly traded Canadian money managers fared even worse, as the Cambridge Index for Canada fell 14.4%, compared with the 29.7% ex-dividends return of the Toronto Stock Exchange.
Money managers in the United Kingdom, however, recovered from unusually low levels at the end of 1998 to bring the Cambridge Index for U.K. managers up to a 35.8% return, roundly surpassing the FTSE All-Share index one-year return of 21.3%.
Cambridge International also found that valuations of money management companies were as tiered as the 1999 U.S. stock market, with large, fast-growing managers selling at premium prices and value-oriented, poor performers fetching much lower prices in merger and acquisition deals.
The tiering of the stock market also punished the shares of public money managers accordingly, Cambridge found. Money managers without a growth bias were treated savagely by the market, trading at a record low multiple of between five and eight times earnings before interest, income taxes, exceptional items and authorization of good will. The median share of publicly traded U.S. money managers was 8.8 times EBITA in 1999, compared with 11.6 times EBITA in 1998.
But the growth-oriented darlings of the market -- Kansas City Southern Industries, Eaton Vance Corp. and AMVESCAP PLC -- were trading between 14 and 18 times EBITA and buoyed up Cambridge's data so much that the weighted average valuation ratio of 13.1 times EBITA barely moved from its 1998 level. In fact, the five largest money managers by market capitalization -- Kansas City Southern, Franklin Resources, AMVESCAP, Alliance Capital Management and T. Rowe Price Associates -- accounted for 70% of the total market value of the shares of all U.S. public investment managers last year.
Cambridge noted that only three U.S. money manager stocks advanced in both price and valuation multiples last year: Kansas City Southern, AMVESCAP and Eaton Vance. These three companies had the highest valuation multiples, trading between 16 and 18 times EBITA -- about twice the median. They also traded at a respectable 25% to 40% premium over the weighted average.
Four companies -- T. Rowe Price, U.S. Trust Corp., The John Nuveen Co. and Federated Investors Inc. -- had respectable revenue lifts in 1999 and saw their share prices rise, but valuation multiples dropped 10% to 15% because they lacked growth stock management capabilities, said the authors of the Cambridge report.
Less fortunate companies such as Fiduciary Trust Co. International, Nvest Cos. LP and United Asset Management Co., with stalled or declining assets, revenues or earnings were walloped with drops in multiples of between 30% and 40%.
Companies that issued initial public offerings in 1999 -- BlackRock Inc., Gabelli Asset Management Co. and Neuberger Berman LLC -- were probably sorry they did so, as they were caught in the tiered market that seemed to reward only growth stock managers, Cambridge suggested. All three managers saw their stock end the year trading below the median multiple of 8.8 times EBITA.
Neuberger Berman's IPO, said Cambridge's authors, illustrated the problems of value managers in 1999. The company issued its IPO in October at an unusually low multiple of 6.9 times EBITA. It ended the year with a 5.4 times EBITA multiple.
U.K. public investment managers were no doubt much happier with the performance of their stocks last year than their North American counterparts.
After a short correction in the second half of the year, Cambridge's report noted that U.K. managers' multiples of moved nearer historically higher trading levels, ending the year at a median of 16.9 times EBITA with a weighted average of 17.2 times EBITA.
The lowest multiple for a U.K. manager was 15.5 times EBITA, which Cambridge suggested showed an absence of the kind of tiering of growth managers vs. any other kind of manager that was seen in the U.S. market in 1999.