Over 40% in Asia and Money Management?

Yep, that's right -- over 40% of the portfolio is invested in Asian mutual funds or in stocks of money managers or related companies. These are 2 powerful themes that I believe provide the portfolio a key advantage in terms of outperforming.

My only international exposure from a fund perspective is in Asia (I own or have owned individual stocks that are based in other countries). Free markets and free people will create the most wealth IMHO -- and Asia has one of the best backgrounds of free market policies and more or less democratic institutions -- relative to other emerging/developed markets I think that is true. Latin America has too many socialists as does Europe. I could see potential in eastern europe but so far I haven't done the research to identify the right way to play that region.

I use the Matthews Asian funds because their philosophy fits in well with mine -- long term, focused on fundamental research -- benefiting from trends, while not being closet indexers (too similar to their index benchmarks) and they perform well in down markets.

To me money management stocks have a great tailwind -- their revenues and profits are driven by the amount of assets under management, which benefits from market appreciation plus any new cash flows into their funds -- that is the growth kicker that allows some managers to really outperform the market. My main position is in AllianceBernstein (AB) -- they have had very strong growth in assets both due to market appreciation and to new cash flows. The stock has been a strong performer for many years although I have owned it only since 2001. In the past I have also owned Franklin Resources (BEN) and T Rowe Price (TROW) -- both excellent choices as well.

Alliance's growth is driven by global equities -- international markets have performed better so that helps asset growth; their growth has also been driven by new cash flows from non-US clients. The market for asset management is less mature overseas -- its more tied into the big banks, which is where the US market was 40 years ago -- I expect specialists like Alliance to gain share. The other aspect of Alliance that I really like is the high net worth business -- they have 13% of their assets from this distribution channel but it represents 23% of management revenues -- nice fees. It is an area they are growing especially with new international offices. Alliance has 1% of assets in hedge funds which doesn't sound like much but the incentive fees they earned last year were enough to represent 20% of management fees in the 4th quarter.

While my exposure to asset managers, especially Alliance, is large, I see the stocks as more exposed to global equity markets and therefore not as tied to how one source of earnings performs (such as Pepsi with snacks or beverages).

Money management is also very profitable both in terms of margins but more importantly in terms of free cash flow production and returns on capital. its a great business in general and I think Alliance is a well managed choice at an attractive valuation -- their MLP status provides over a 5% yield based on 2007 estimated EPS.

I will cover DFR, ACAS and FDS -- my other money management related stocks in future notes.