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    Pump Up Your Portfolio With Other People’s Money

    So are you bullish on the market, or are you looking for the bears to come back out of the woods to take a swipe at recent gains so far this year?

    But why make that call? Instead, there are investments that you can easily buy that don’t rely on being a bull or a bear and betting your retirement that you’re going to be right.

    The key is to own businesses that take their profits from other people’s bets on the market. Being a toll taker — taking dollars as other people’s money flows through the markets, as well as being invested in their pension and retirement accounts — is a way to profit whether the bulls or the bears have their way.

    This has become a very attractive way of investing for the big guys. Institutions have been stepping in and expanding their investments in this area of the market. Those in this area of the market have been banding together and merging to have control over even more tolls in the markets. The recently shareholder-approved merger of the New York Stock Exchange (NYSE, NYX) and the IntercontinentalExchange (ICE) is an example.

    I’m talking about owning the stock market itself and the management companies of pension and other retirement funds.

    In both cases, by owning the market, investors get paid exchange fees on every little buy and sell that comes across the stock exchange. And the fund manager gets paid by taking a fee on the underlying assets, regardless of whether the fund manager made the right calls on being bullish or bearish.

    Toll taking is the way to be neutral on the markets while getting paid — and paid well — on other peoples’ money, as they try to make their own calls on the markets.

    A Market To Buy

    Mention Spain right now to an investor, and you’ll get a quizzical look. After all, the EU is still dealing with its credit issues and bank bailouts, along with government debts. The list goes on and on.

    But wait. This is about investing with other people’s money, rather than making a bet that a nation, an economy or a company’s stock is going to rally.

    Spain is a nation, an economy and a market that I’ve had long experience with, going back to the early 1990s when the nation was working hard to clean up its finances and gain entry into the beginnings of the euro, as well as gaining economic and market respectability.

    Back then, the nation was using the peseta, and the bond market wasn’t being kind to the government and corporate issuers.

    But the leaders in Madrid were taking notice of the success of fellow peers in the EU that were starting to reform their spending and borrowing and gaining huge inflows of capital.

    I stepped in and placed my bet on the nation, buying the bonds of the nation in the local currency. The results were good; yields came down as the nation’s credibility went up, driving up bond prices sharply. And the currency went up against the U.S. dollar.

    That was a while ago. As you have read, heard and seen on the evening news, Spain and other EU nations ran into some troubles as they stepped away from their economic reformations. The result was that the markets were punishing.

    But the Spaniards have begun to respond, and the local stock market index is up. In fact, it’s up more than even the recently buoyant Standard & Poor’s 500 index by more than 23 percent.

    But this is just a back story; don’t take a chance on market direction. Instead, I want you to get paid on every single stock trade that goes through the local stock exchange of Spain.

    Bolsas y Mercados Esponoles SA is the stock, bond and derived security market for all of Spain.

    The company owns the exchange in Barcelona, which it combined with the exchanges of Madrid, Bilbao and Valencia to become the market for the entire country.

    The result is that the company has become the toll collector for all that trades. That means that whether stocks, bonds, options or anything else that trades in Spain goes up, down or nowhere, it gets paid.

    Moreover, it also pays its owners.

    Flush with cash coming in daily from trades happening around the nation, the company pays dividends that are running at a yield of about 8 percent.

    And as the market toll collector, it has control over the whole market; so it has a near lock on all that trades and moves in Spain. This means that cash flow will continue to feed the ample dividend mentioned above.

    With the global consolidation of exchanges, as noted above with the New York Stock Exchange and the Intercontinental Exchange, I’m looking for a buyout to happen — meaning some gains in the stock price in the coming months or quarters.

    I’m not alone; the shares are trading up more than 56 percent for U.S. investors over the trailing year. Yet the shares are still more cheaply priced compared to other major stock exchange companies in Europe and beyond.

    Bolsas y Mercados Esponoles SA trades on its own exchange under the symbol BME. But in the United States, you can buy it as an American deposit security (ADR), which I recommend, under the symbol BOLYY. It’s a market-maker and toll-taker buy in small sums under $15 a share.

    The company recently announced special dividends, which will bolster the overall annual dividend. The special dividends will be paid for owners of record as of June 27 to distribute some of its excess cash.

    That’s just the start of making money on other people’s money. I’ll remind you of another good business to be in that doesn’t require a bet on the markets’ direction.

    Manage Other People’s Money

    It’s good to manage other people’s money in the fund-management business, as I recommended in Market Goes Up Or Down, And You Still Get Paid and in Want A Fatter Pension?.

    This is a good business; and I should know. I’ve had fund-management companies as customers of my banks and brokerage companies, and I’ve made sure that they had access to the best execution and service that I could provide.

    I’ve also been a fund manager. I enjoyed providing my customers positive returns while also providing for a nice stream of fee income for managing the money under management.

    The key to being a successful fund company is not necessarily to be a good manager or even the best in their funds’ returns (although it helps); rather, it’s to gain and hold on to a large and expanding base of fund assets.

    Fees are levied on fund assets, meaning the more assets the manager has on the books, the higher the fee income on those assets.

    Unlike hedge funds, pension fund fees aren’t based on performance. Instead, they’re based solely on how much is in the funds.

    This means that whether the S&P 500 keeps going up, down or nowhere, fund-management companies get their fat checks by just skimming a little off the top of every dollar under their management control.

    If the market is positive, it only helps to raise more money for the fund management, as well as growing the fund through positive market appreciation.

    One of my favorite money managers is AllianceBernstein (AB), which continues to attract more investors’ cash. That, in turn, empowers the fund-management company to produce more and more fee income for its shareholders with higher dividends.

    Its shareholders profit in both bullish and bearish markets from the fee income from its funds under management, thanks to the rally this year in the market that’s bolstered the value of the assets under management. But if you go back to the troubled market times, AllianceBernstein, with few exceptions, has been good at keeping customers on board.

    Its customer retention rate continues to climb, helping to ensure that the company continues to perform well and pay its shareholders well. In just the trailing year alone, investors have more than doubled their money, with returns running at more than 124 percent.

    Whether good or dire market times for the S&P 500, AllianceBernstein pays its shareholders good dividends, with a current yield of 6 percent. It’s a great cash-payer that’s getting noticed with a rising stock price. Continue to buy some AllianceBernstein under $30 a share.

    Own the market and manage the cash. Either way, you’ll get nice fat dividend checks; and you won’t have to take a flier on whether to bet on the bulls or the bears.

    — Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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