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Tuesday, April 08, 2003

By Len Boselovic, Post-Gazette Staff Writer

Investors have suffered through the worst three-year stretch in the stock market's history, not exactly the alignment of stars you'd expect would catapult an investment firm to the top of The Post-Gazette's annual list of regional companies with the best return on equity.

	Behind the Numbers Graphic: Top 50 Return on Equity Federated Investors Business: Mutual funds and money management Headquarters: Downtown Employees: 1,706 H.J. Heinz Co. Business: Food products Headquarters: Downtown Employees: 39,000 Dick's Sporting Goods Business: Retailing Headquarters: Findlay Employees: 9,900 Ansys Inc. Business: Analysis and engineering software for designing new products Headquarters: Canonsburg Employees: 450 Matthews International Business: Bronze grave markers, other identification products and caskets Headquarters: North Side Employees: 3,000

In a year when the stock market fell faster than the Pittsburgh Pirates' pennant hopes, Federated Investors posted a remarkable 70.5 percent return on equity. The home-grown mutual fund giant also topped the list three years ago.

Federated easily outdistanced second-place finisher H. J. Heinz Co., which had a return on equity of 53.9 percent for the fiscal year ended May 1. Dick's Sporting Goods (43.2 percent); software maker Ansys (23.2 percent); and Matthews International (21.5 percent) rounded out the top five.

Consol Energy, the top performer on last year's list, finished 32nd with a 4.6 percent return.

Return on equity -- or ROE -- is one of the standard measures analysts use to determine a company's vitality. It is determined by dividing net income by stockholder equity (retained earnings plus proceeds from stock offerings). The higher the percentage, the more profits management has generated from money invested in the business.

Like other yardsticks, ROE is only as good as a company's accounting. Moreover, it differs from industry to industry because of the way certain corporate expenses are treated for accounting purposes, says Harry Evans, a professor of business administration at the University of Pittsburgh's Katz Graduate School of Business.

High-tech companies that spend considerable sums on research and development have to expense those costs in the year they are incurred, which reduces earnings and lowers ROE, Evans says. Other types of large investments can be expensed over several years, which takes a smaller bite out of earnings in any one year and therefore doesn't make as big a dent in a company's return on equity, he says. That's why comparing the ROE of two companies from different industries will tell you only so much.

An apples-to-apples comparison between Federated's return on equity and that of its peers is complicated by the fact that none of the firms does exactly the same thing or are of the same size as the others. Among Federated's closest competitors, ROE ranges from 10.5 percent for Franklin Resources to 66.5 percent for Waddell & Reed Financial.

Typically, a faltering economy and subsequent sagging profits make it more difficult for many companies to elevate their ROE. Federated clearly didn't have that problem last year. The company earned $203.8 million, or a record $1.74 per share. Assets under management at year-end jumped 9 percent to $195.4 billion.

Two phenomena are boosting Federated's fortunes. First, investors have grown weary and leery of the stock market, which plays into Federated's strong suit: a strong stable of bonds, money market and other fixed income funds that investors crave in troubled times. Secondly, investors are less confident about managing their money on their own and are seeking professional advice. Federated sells its funds through banks, brokerages and other financial service providers who can hold jittery investors' hands.