Are these the best fund managers money can buy?

I’ve always been a little wary about investing in listed fund managers. They seem to cop so much negative media from the financial press and are generally subject to the emotions of investors, which leaves me wondering if they can truly outperform over the long run.

I’ve started to reconsider the merits of this view after an impressive earnings season. Analysts are also suggesting that it might not be too late to buy shares in some of Australia’s largest and best listed fund managers.

Here’s a rundown:

IOOF Holdings Limited (ASX: IFL) has been rated a ‘buy’ by many analysts due to its recent acquisition of SFGA Australia Ltd and impressive containment of costs. They expect that the purchase will be earnings accretive immediately and should boost group margins.

Perpetual Limited (ASX: PPT) has also been rated as a ‘buy’ due to strong net inflows of $900 million over the past financial year. The group has also opened a new fund aimed at global shares and is seeing strong earnings growth through its Perpetual Private division.

Meanwhile, dual-listed Henderson Group plc (ASX: HGG) specialises in UK and European listed funds and is viewed as a ‘hold’ after a remarkable share price run over the last 12 months. The group is aiming to double its assets under management in the next five years, but analysts are worried that this growth may be achieved only with a contraction in margins.

Finally, annuities and fund manager Challenger Ltd (ASX: CGF) delivered an impressive year which has seen a 50% increase in the share price. Retail sales were up a healthy 12%, but analysts at Citi Group believe that the push for sales growth will result in margin contraction over the medium term. As a result, the company is placed on a ‘hold’ until it either becomes cheaper or proves that costs can be contained.

The biggest problem for me however, is that investor sentiment plays a big part in the success or otherwise of these companies. The best investors, like Warren Buffett and Peter Lynch likely wouldn’t invest in these companies as they are unlikely to be able to maintain earnings and dividend growth throughout the cycle.

Instead, the $60 BILLION man Warren Buffett would likely invest in ASX companies that have long and strong histories of outperformance. Learn how he invests and get two brand new ASX ideas that Mr Buffett would love by clicking here.

Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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