Wealth managers can make you wealthier
Buy them, don't pay them to manage your money
I find the term “wealth management” amusing since people who manage other people’s money are parasitical to the wealth of their clients, create no wealth (since they make nothing, and wealth is created by altering the shape of matter near the Earth’s surface, and by little else). Financial “assets” are in fact liabilities of the wealth creating entities in which they represent claims. Shares of public companies have value only to the extent that the actual business in which they comprise a residual claim can deploy capital at a return that exceeds the cost of that capital. Secondary trading in those securities attracts transaction fees, commissions, and in the case of “managed money” management expense ratios (MER’s) which often include not only a percentage of value of the “assets” under management (AUM) but also a further charge if the return on those portfolios exceeds some threshold.
The billionaires that exist on Earth fall into three or four categories - those that founded businesses that actually created wealth (eg. Microsoft, Apple, Tesla); those that inherited money from their families who actually created wealth (eg. Rothschilds, Rockefellers, Hermes); and, those who charged a fee to manage other people’s money (Johnson, Schwartz, Druckenmiller).
Ned Johnson is a great example. Johnson created Fidelity Investments which issued one share which he held until his death, and was then passed on to his daughter Abigail. Fidelity charges fees to manage investments on behalf of clients and now manages over $1 trillion of other people’s money. It would be hard to find a client who came out of Fidelity better off thant the Johnson family.
Many “asset managers” are private companies, but there are public ones as well. They are a toll gate on secondary trading of stocks and bonds, take little risk (their client’s take the risks) and have high returns on equity. Names like Larry Fink, Steve Schwarzman and Ray Dalio come to mind. There is no shortage of “hedge fund” billionaires.
The “asset manager” I think investors might find attractive is Patria Investments (PAX). With a market capitalization of about $2.2 billion at the current share price of ~$15 a share (about 32 times forward earnings) and a dividend in the 4% range, the shares are not cheap. But Patria is a Latin American fund manager in its growth phase in my opinion, with about $27 billion of assets under management. Latin America is a low risk jurisdiction in my opinion, and one that should see increased growth in the middle class as the Latin American countries keep developing.
A quick review of Patria’s website will demonstrate that the company has broad exposure to all aspects of Latin American development. Rather than go through a deep dive on short term metrics and ratios, I value “asset managers” based on the assumption they can earn 1% of AUM as revenue, in the case of Patria today about $265 million (the company reported $235 million of revenue for the year ended December 31, 2021 with net income of about 50% of that revenue ($122 million or $0.90 per share). I expect 2022 to come in somewhat less which in my view creates a buying opportunity since my belief is that AUM will keep growing and the shares take on a different complexion if AUM reaches $50 billion or more, something I expect as a reasonable possibility over the next 5 to 7 years. The business does not require a lot of capital so investors can reasonably expect some level of dividends to continue.
I typically do formal valuations on companies I review, but in this case my opinion is based on macroeconomic factors rather than company specific factors. Latin America will develop. As the middle class grows, more money will find its way into investments. Patria is in a good position to grow with the Latin American economies and offers a diversified and broadly based exposure to the economic growth I see as more likely than not over the next decade or two. So, while I have listed it in my review of “undervalued American stocks” I offer little analyitical support for my thesis but find the company to have demonstrated capable management and a thoughtful approach to “wealth management”. Like all investments (and perhaps this one more than most) there is no shortage of risk.