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JP JP Morgan's Bizarre Potshots, But Federated Will Have Last Laugh
HANOVER, NH (ETFguide.com) - If JPMorgan was Chrysler, they just said Toyota doesn't know how to build cars. In the space of two months, JPMorgan has downgraded Federated from "Overweight" to "Underweight." The fact that Federated has grown their fund business by 9% in the past year and JPMorgan by only 3% was not mentioned.
JPMorgan isn't clueless about the money fund business. According to Crane Data, JPMorgan (NYSE:JPM) manages $347 billion in money market assets; Federated (NYSE: FII) $283 billion. JPMorgan analyst "Kenneth B. Worthington cut his rating on the Pittsburgh-based investment manager to 'Neutral' from 'Overweight' in response to a prediction from JPMorgan's economics team that the Federal Reserve will implement a zero interest rate policy." Oddly, that logic doesn't seem to apply to JPMorgan. Landenburg Thalmann upgraded JPM on December 8th.
Federated's recent growth of $124 million in new revenues is quite an accomplishment, considering that Fidelity, American Funds and Vanguard have all experienced around 30% declines. Yet, thanks in part to JPMorgan, Federated's stock has also lost 30% of its value. Though again, it's revenues are growing.
Could JPMorgan believe that tarring Federated will scare investors over to its asset management unit? Call me old fashioned, but I don't think it appopriate for Jamie Dimon to take public money on the one hand (the Fed's assistance with Bear Stearns for starters) and use the other to club a competitor. Worse, the government is seeking to restore faith in the markets. Unlike JPMorgan, Federated doesn't have an investment banking unit from which to defend itself.
Worthington opined, "If the Federal Reserve cuts the federal funds rate to zero, Federated Investments may have $100 million in fee waivers. We did not contemplate a zero interest rate environment when we recently upgraded the stock."
I couldn't disagree more about Worthington's implication that fees are sensitive to returns or that interest rates dictate money fund profitability.
The asset management business has never been sensitive to fees. Never. The Fed rate can go to zero and it doesn't mean that Joe Manufacturer is going to buy his own treasuries. When investors face losses of 30% they're not going to complain about losing only 3%. They want safety. The people who invest with Federated can't put their money under a mattress.
Federated isn't going to start offering their funds for free and neither is JPMorgan. Why does Mr. Worthington single out Federated as a bad bet? In the money fund business fee waivers are marketing expenses. If Federated decides to give back $100 million you can assume it will recoup much of it later from increased assets.
The good news is that JPMorgan has given investors a rare opportunity. Federated is the only public pure-play money manager. If you think money is going to remain more valuable than equity, then Federated will continue to grow. If you still have difficulty with the concept of growth in financial services consider this: retailers went down but Walmart went up.
As of November 30th, investors poured $1.1 billion into Federated Funds. While Mr. Worthington is contemplating the hypothetical effects Federated taking in real money. ETFs that have products similar to Federated are also seeing these benefits.
In November, the third largest increase in ETF assets occured in the long-term bond category, almost $1 billion. Recently, in the 3rd week of December, iShares iBoxx $ Invest Grade Corp Bond (NYSEArca: LQD) grew 14%, adding $804 million in new shares. Tantalizingly, iShares iBoxx $ High Yield Corporate Bd (NYSEArca: HYG) added $345 million new shares, an increase of 32%.
The resurgence in higher yield corporate debt will be a boon to Federated and, of course, JP Morgan. You can find more detail under reports at FundAnalyze.com.
Getting back to Federated. The asset management business moves at a glacial pace. Little happens in 30 days that has a long-term effect on an asset manager's valuation relative to its peers. For example, even with the market turmoil, Neuberger Berman reportedly sold for 4% of assets.
Federated is now valued under 1% of assets. That won't last. Federated has a conservative value of $29 a share. That's what it was a few months ago and that's what it will be again.
Max Rottersman is a principal of Hanover Technology Group, LLC. His opinions don’t necessarily represent the views of ETFguide.com or Yahoo Finance. He does not own shares in JPM, FII, and does not have a consulting relationship with either.
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