Forecasts Rising For Fund Managers

The spring rally has led to higher profit expectations for mutual fund managers.

To a large extent, this is a bit of a no-brainer for those who understand how the investment management industry works. Money managers earn a fee based on assets under manager (AUM). Any increase in the size of a portfolio should result in more fee dollars.

The S&P 500 rose approximately 40% since early March. All things being equal, AUM should have increased as a result.

However, fund managers have also enjoyed an influx of dollars. According to Strategic Insight, U.S. investors added more than $55 billion into stock and bond funds last month, making May the second consectuive month with $50+ billion of inflows.

It's worth adding the calendar into the explanation for why estimates are rising. The first-half of the year is almost completed. We already know what the first-quarter profits were and the data signals that the second-quarter should be strong. This means that analysts should have greater confidence about what full-year earnings will look like than they did 2 months ago.

But, given that most of this is already known, why did many analysts wait until the past 7 days to raise their forecasts? The announcement of May AUM numbers are the likely reason.

Last week, Invesco Ltd. (IVZ - Analyst Report), Franklin Templeton Investments (BEN - Snapshot Report) and AllianceBernstein Holding (AB - Snapshot Report) all said AUM rose in May relative to April. Though this should not be surprising, analysts probably wanted confirmation of higher AUM before adjusting their profit forecasts.

Mergers Could Provide An Additional Boost

Though the trend in earnings estimates revisions is a positive, there is also speculation that more mergers could be forthcoming in the industry.

Such discussion was brought to the forefront last week with BlackRock's (BLK - Snapshot Report) acquisition of Barclays Global Investor. Once the deal is completed, it would make BLK the largest money-management firm. Included in the deal is Barclays' (BCS - Analyst Report) iShares business.

Still, it's important to realize that mergers are unpredictable. Therefore, investors should view the potential for other deals as a possible bonus, rather than a reason to invest.

Still Room For More Upward Revisions

A better strategy than counting on a merger would be to keep an eye on the Zacks Rank. TROW is a Zacks #2 Rank ("buy") stock. AB, BEN, IVZ and JNS are Zacks #3 Rank ("hold") stocks.

The sheer number of covering analysts is reason why none of the stocks are on the Zacks #1 Rank ("strong buy") list. Agreement is one of the factors considered by the Zacks Rank and while several analysts have raised full-year forecasts, others have not. The lack of revisions by all of the covering analysts hurts the Zacks Rank, but also provides the potential for more estimate revisions.

The assumption being, of course, that current consensus estimates are too conservative. Given current trends, this assumption may well turn out to be correct.

(BLK and BCS are also Zacks #3 Rank stocks. However, the short-term outlook for these companies could be impacted more by the pending merger than earnings estimate revisions.)

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.