Shares of Financial Engines, Inc. (FNGN), a service provider to defined contribution plans and individual investors, fell in the third quarter. While the company continues to penetrate the market, investors have become concerned about profitability and competition. Gross profit yield continues to gradually decline as plan providers use their gatekeeper positions to receive a higher share incremental economics. Investors are also concerned that cheaper target date funds could take market share. We retain conviction about the company’s unique product and significant market opportunity. (Michael Baron)
The share price of Financial Engines, Inc. (FNGN), a service provider to defined contribution plans and individual investors, has declined by approximately 50% year-to-date. Although we thought its valuation was justified by its growth prospects, lower profit yield in 2014 and investor rotation away from less established businesses led to the drop in share value. We took advantage of its attractive stock price to add to the Fund’s investment and believe its long-term investment premise still holds. Financial Engines is the dominant player in a $5 trillion market, with roughly $900 billion in plan assets under contract and $100 billion in assets under management. Significant potential exists to add to these amounts through increased sales to plan sponsors and improved marketing to plan participants and broadening product offerings. Additionally, we believe the company should eventually be able to use its expertise to service the IRA and defined benefit market, each of which represents an additional $5 trillion in assets. We believe that Financial Engines’ essential advice offering and plan connectivity advantage will result in significant client growth and a highly profitable recurring revenue stream. (Michael Baron)
From Ron Baron (Trades, Portfolio)’s Baron Growth Fund Q3 2014 Report.
