It was pretty clear that asset managers were invincible during the wild bull market of the 1990s.

Thanks to that breathtaking stock market run, clients' portfolios mushroomed dramatically, and asset managers lined their pockets with pretty healthy fees. Keep in mind that at the large asset-management firms, fees are typically proportional to the amount of money under management.

So, as we all know, earnings surged, and stock prices skyrocketed. In fact, profits at one typical company grew by about 50 percent in 1999 and the following year by another 27 percent.

Accordingly, asset managers were so hot, points out Morningstar analyst Rachel Barnard, that it was probably the most profitable place to be. There were few around that were as closely tied to the market's fortunes as those people managing investors' money.

However, by 2002, times obviously weren't so flush. And this year, because of a special set of economic and geopolitical uncertainties, the stock market could start tumbling again.

Notwithstanding these protestations, none of the events will affect the strongest players in this sector, or their stocks. It is no big surprise that asset managers with a bias toward equities have suffered in recent years. Profits at Gabelli have taken a big hit; the same can be said for Neuberger Berman and Franklin Resources, but managers who have been strong in bonds have done reasonably well, even in the downturn. For instance, Blackrock and John Nuveen have consistently increased earnings despite the market's malaise.

So, what keeps the best asset managers afloat during downturns? Here comes that word again: Diversification. Investors who spend countless hours mulling over asset-management stocks should focus instead on those businesses that have big stakes in fixed-income products, as well as equities. Why? Because diversified firms are able to keep more of their clients' money in house, and thus stand a better chance of thriving regardless of the market's direction. Raymond James analyst Steven Schwartz says, "There are plenty of asset-manager families out there with enough diversification to weather the storm."

Also, strong asset managers tend to generate plenty of cash, even during downturns. Despite the bear market, this remains a "hugely profitable" industry, says Morningstar's Barnard. Moreover, many asset managers issue dividends, considered the coin of the realm in 2003.

Listen, asset managers might not be enjoying a go-go stock market these days, but that doesn't mean diversified firms won't prosper this year.

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