Fund Managers’ Stocks Are Still Riding High : Investing: Some analysts say publicly traded mutual fund companies are overpriced; others see further gains.

NEW YORK —  Some prosperous members of the current generation of mutual fund investors got that way without buying shares of any fund.

Instead, they bypassed the standard role of fund customer and put their money in the common stocks of publicly traded fund management companies, which have reaped mighty benefits from the industry’s long boom.

The strategy involved, and still involves, a lot of extra risk. Stocks of money management companies often are volatile, and they don’t offer the diversification that is a prime selling point of a fund portfolio.

So far, however, it has paid off handsomely. For example, shares of Franklin Resources Inc., a New York Stock Exchange-listed company that manages the Franklin and Templeton fund families, traded at mid-August around $45 a share, almost double what they sold for in early 1992 and more than 10 times their low in late 1987.

The stock of T. Rowe Price Associates recently topped $60 in the NASDAQ national market, up from less than $15 in late 1990.

So far this year, the Dalbar investment company stock average, published in the Boston-based trade paper Mutual Fund Market News, sports a gain of better than 21% through early August.

By contrast, the average mutual fund, as calculated by the Morningstar Mutual Fund Performance Report of Chicago, posted a total return of 8.13% through the first seven months of 1993.

One thing all this tells even the casual observer, of course, is that running mutual funds has been a lucrative business in recent years. Profits are rising sharply at most firms in the industry.

Unfortunately, however, it provides no assurance that the managers’ stocks will keep doing well. Indeed, while a good many analysts still like their prospects, some think the group is primed for a big setback.

“Stocks that are likely to be among the hardest hit in the next market decline will be those of investment companies,” argues Stephen Leeb in his advisory letter The Big Picture.

“Fund companies’ profits are derived from the fees charged on assets under management. In bull markets, when new money is rolling into an investment company’s funds, Wall Street analysts tend to project rosy forecasts for the company’s future earnings.

“A market decline has a twofold impact on a fund company’s profits. Assets under management decline, as the stocks in their portfolios slip along with the rest of the market.

“At the same time, new money stops flowing in, while some existing cash under management may head for the exits. All of this translates into reduced earnings.”

In the market crash of 1987, investment managers’ stocks certainly took a beating. Dreyfus Corp., for instance, which traded as high as $45.50 in early 1987, fell as low as $16 that autumn.

Proportionately, that was a much bigger drop than most stock-fund investors experienced, even in the most aggressive growth and capital-appreciation funds.

The crash, however, turned out to be a good time to be buying stocks like Dreyfus, which climbed back to $50 by late 1991.

The long growth trend in the industry’s assets and earnings, like the bull market for stocks in general, was only temporarily interrupted by the crash.

Though some observers believe the stock market is nearly as overpriced now as it was in the summer of 1987, many still maintain that the funds’ business has further room to grow.

“The financial sector remains attractive from a long-term perspective,” maintains Edward Nicoski at Piper Jaffray Inc., a Minneapolis investment firm.

“The huge gains of 1992 are not likely to repeat themselves, but the sector still appears likely to offer good relative performance. We feel the demographic trends strongly favor the ‘gatherers of assets’--investment management and services, diversified financial services and the brokerage firms.”