Fundsters, be warned that the public continues to be confused about your firms' valuations, especially when the good times keep on rolling.

In the latest example of this confusion, the Financial Times ponders the S&P 500's 18 percent rise this year compared to the bigger rises in the share prices of several publicly-traded shops with big ETF businesses. Indeed, the newspaper wonders if investors should invest in shares of ETF providers instead of investing in ETFs themselves. After all, BlackRock's shares are up 35 percent year-to-date, almost double the S&P 500's gain. State Street's up 25 percent, and Invesco is up 21 percent.

Part of what's going, as pointed out by hedge fund titan Daniel Loeb of Third Point and highlighted by the FT, is that the big ETF shops are gaining more and more inflows (and thus AUM marketshare) compared to other asset managers. By this logic, the valuation boost is a combination of a rising tide lifting all boats and certain boats being positioned to climb even higher than others.

Yet there's another core connection that also drives this share price boost for ETF shops and other asset managers. As an industry, asset management is not capital-intensive, and it tends to be high-margin. It's costs are also less variable than its revenues. When the markets are up, revenues are up, yet costs don't rise as much. When the markets are up a lot, that raises both revenue and margins, which means that asset manager stocks should act almost live leveraged ETFs for the overall market: when the market goes up, asset manager stocks should go up by more, and when the market falls, asset manager stocks should fall further. That ETF providers' own shares magnify this current bull market's results should surprise no one. 

Edited by: Neil Anderson, Managing Editor


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