The growth potential of alternative-asset and wealth managers looks compelling

Providers of alternative assets and wealth management offer favorable long-term growth potential and are attractively priced, says Fidelity's Nadim Rabaia.

• As portfolio manager of a fund tightly focused on the brokerage and investment management industry, Fidelity's Nadim Rabaia thinks alternative asset managers and wealth management firms are among the most attractive investments looking out over a multiyear horizon.
• "I believe businesses in these two segments can generate above-market growth in revenue and earnings per share over a full business cycle," explains Rabaia, who helms Fidelity^® Select Brokerage and Investment Management Portfolio. "I also believe this dynamic is not being fully reflected in the stocks' valuations."
• Rabaia's investment strategy is designed to help him choose stocks he views as mispriced relative to the company's long-term earnings power. Regardless of the economic environment, he positions the portfolio to be largely balanced from a cyclical perspective, which he seeks to achieve based on analysis of the outlook for interest rates, credit risk, unemployment and equity values.
• Alternative asset managers have increased their penetration in both institutional and individual investor portfolios, according to Rabaia, who believes well-managed providers stand to benefit from increasing investor interest in alternative assets, such as private credit and infrastructure.
• Among his high-conviction holdings here as of January 31 were Apollo Global Management, Ares Management and KKR, each of which Rabaia considers a strong fit for the fund, given their attractive valuations relative to their long-term earnings-growth potential.
• Meanwhile, Rabaia believes wealth management also is well-positioned. "The long-term trend of advisers moving away from wire houses is positive for this group, as is the industry trend of moving away from brokerage relationships and toward advisory engagements," he explains.
• Rabaia points to Ameriprise Financial, LPL Financial Holdings and Raymond James Financial as notable fund investments with the potential to benefit from this long-term shift in adviser behavior.
• In conjunction with his overweight in alts managers, Rabaia remains underexposed to traditional asset managers, where he sees less opportunity.
• "I've maintained this underweight because many traditional players have experienced flat-to-negative shareholder flows due to competition from passive options, and I expect this trend to continue," he concludes.