Fourth-quarter 2010 earnings for asset management firms will reflect a “transition quarter” of largely positive fund flows, said Keefe, Bruyette & Woods analysts in a Q4 preview released Monday.

With the fourth-quarter earnings season starting this week, KBW analysts are raising estimates and price targets for most asset managers as they marked-to-market their forecasts of assets under management and margins to reflect higher equity values.

KBW’s top picks include Franklin Resources (BEN), Invesco Ltd. (IVZ) and Calamos Asset Management (CLMS).

 “We think flows for many managers remained positive as equity fund outflows and fixed income fund inflows both moderated. We believe the risk/reward in asset management stocks is still attractive despite the recent rally,” the KBW analysts said in “Asset Managers 4Q Preview: Tailwind Builds for 2011.”

Highlights from KBW’s Q4 earnings preview of asset managers:

  • The fourth quarter was “somewhat of a transition quarter,” with equity outflows moderating and fixed income inflows slowing, but overall flows should be positive.“We expect outflows from retail equity products moderated as the quarter progressed, as did inflows to fixed income, driven in large part by muni fund outflows. Nevertheless, overall flows should be positive at many managers thanks to continued flows to taxable fixed income strategies, global and alternative products and flows from institutional investors,” the KBW analysts wrote.
  • KBW expects margins will be somewhat higher than its prior forecast thanks to somewhat better revenue growth.“Higher than previously forecast average and ending AUM could result in incrementally better margins relative to our prior forecast. To some extent, the better revenue growth will be absorbed by distribution expenses as well as potentially higher compensation accruals,” according to the analysts.
  • Stocks have moved but KBW still sees some value.“We believe selected asset management stocks are relatively cheaper than they were a year ago, although the valuation gap has narrowed over the past month as investors have bid up some stocks in expectation of improved equity fund flows. Some of our top picks among traditional asset managers include Calamos, Franklin Resources, and Invesco, among others,” the KBW analysts said.

Read about KBW’s 2011 outlook for the finance sector at