One Gets It, One Does Not

I had forgotten about this important exchange in the Barron’s Roundtable a few weeks ago:

Rogers: The stock yields 1.7%. The company cut its dividend a few years ago. It has been buying back stock and is in the middle of a $1 billion buyback program now. It has the cash flow to do this. Everything might fall into place at Legg Mason.

Gabelli: I have owned the stock for a long time. They have $1 billion in net operating- loss carryforwards [a deferred tax asset]. This is a powerful shelter for the cash they are generating.

Gross: Isn’t the business subject to margin pressure? Exchange-traded funds are eroding the ability of any active money-management firm to earn what it historically earned.

Gabelli: I disagree. There are $125 trillion of investable funds on a global basis. The biggest challenge is the shrinkage of the equity portion. Within that portion, ETFs aren’t the issue. We run 45% profit margins. You’re running 80% margins.

Gross: I’m talking about fees as a percentage of assets. I’m not talking about your operating margins.

Rogers: Take it outside, guys.

Gross: No. I refuse.

Zulauf: It isn’t a secret, Mario, that fees in the money-management business are under pressure.

Gabelli: Not so. Fees are rising because of the amount of money going into hedge funds.

Rogers: Bill, in some parts of the business there is some margin pressure. In the S&P 500 ETF business, there is margin pressure. In the index-fund business, there is margin pressure, and in the active-management equity business there has been margin pressure for my entire 30-year career. But, it has been gentle.

Gross: Well, stand by.

Rogers: Fair enough.

Gabelli: If you want to preach in favor of mindless investing, we don’t have to stand by.

Gross: It is about what investors are willing to pay for.

Gabelli: No, it is about what their intermediaries — their gatekeepers — are willing to pay for.

Gross: If you are in the business 20 years from now, Mario, and you are right, I’ll buy you a steak dinner.