Market gains in the third quarter benefited the largest publicly held institutional money managers, although continued investor hesitancy in a volatile market — and in the face of the upcoming election — kept net inflows relatively low.
The largest publicly held institutional money managers all saw gains in assets under management in the third quarter, according to earnings reports, partly reflecting quarter-end returns of 6.35% by the Standard & Poor's 500 and 6.99% by the MSCI Europe Australasia Far East index. The Barclays Capital Aggregate Fixed Income index returned 1.59% in the quarter.
However, managers' revenues for the quarter didn't always parallel their asset increases, as some firms, like State Street Global Advisors and Goldman Sachs & Co., saw declines.
Overall, managers' flows reflected investors' continued hesitation to increase their risk levels.
“Both active domestic and international equities continue to have outflows, so there was a little push and pull for the equity guys,” as stock outflows continued despite good performance in the market, said Mac Sykes, Rye, N.Y.-based analyst at Gabelli & Co.
“If you look at industry data, as well as the data we've gotten thus far from the specific companies, clearly investors continue to favor fixed-income or alternative or multiasset-class type strategies and continue to broadly avoid the more traditional core equity strategies,” said Michael Kim, New York-based analyst with Sandler O'Neill & Partners.
“I think that's certainly the trend that we've been seeing over the past few years,” Mr. Kim said.
Mr. Sykes also said the upcoming election will provide some resolution to continuing uncertainty.
“We hope that turns out to be more optimistic than what we saw in the third quarter. We'll be getting a resolution soon in terms of the election, maybe some clarity in addressing the fiscal cliff,” said Mr. Sykes.
The two largest publicly held institutional money managers benefited from market gains and experienced large shifts in passive fixed-income assets in the third quarter.
State Street Global Advisors, Boston, reported the highest gains of the largest managers, with an increase in assets under management of 8.2% from the second quarter, to $2.065 trillion as of Sept. 30. SSgA did not release specific information on net flows, but the greatest increase for the firm in AUM was in passive fixed income, up $72 billion, or 32.3%, to $295 billion, from the previous quarter.
SSgA's exchange-traded funds totaled $336 billion, up 10.2% from the previous quarter and up 36% from the year before.
BlackRock (BLK) Inc. (BLK), New York, reported $3.673 trillion in assets under management as of Sept. 30, up 3.2% from the previous quarter. The firm attributed the increase to market gains and the $6.2 billion in assets from the September acquisition of Swiss Re Private Equity Partners. Those offset net outflows resulting primarily from BlackRock's decision not to rebid for a single $74.2 billion passive fixed-income portfolio because it generated low fees for the firm. Bobbie Collins, BlackRock spokeswoman, said the company would not disclose the name of the client.
BlackRock's asset increase was driven both by market gains and its iShares division, which brought in $25.2 billion in net inflows in the third quarter.
“Certainly (there are) the results at BlackRock, driven by the strong ETF flows within the framework of assets. Invesco (IVZ) should benefit from that. WisdomTree should also benefit from that,” said Mr. Sykes. Both are ETF managers. “That's one aspect in the market that continues to do well despite the migration to fixed income.”
“Asset owners, they continue to deploy capital,” said Mr. Lee. “They may not be deploying it into large-cap growth, but they are deploying it. Also if you particularly look at the ETF business, demand is driven.”
“ETFs are also portfolio management tools so ETFs benefit certainly from greater investment engagement and also benefit as investors use them as different tactical tools.”
Among other money managers, Goldman Sachs Group (GS) Inc., New York, reported $856 billion in assets under management as of Sept. 30, a 2.4% increase from the previous quarter despite net outflows totaling $1 billion. Fixed-income inflows of $5 billion were offset by alternative, money market and equity outflows of $3 billion, $2 billion and $1 billion respectively.
T. Rowe Price Associates (TROW) Inc. (TROW), Baltimore, reported $574.4 billion in assets under management as of Sept. 30, up 6% from the previous quarter. Market gains of $28.4 billion were primarily responsible for the increase, while net cash inflows totaled $4.3 billion, $2.2 billion of which came from the firm's target-date retirement portfolios.
AllianceBernstein (AB) LP (AB), New York, reported $418.9 billion in assets under management as of Sept. 30, up 2.9% from the previous quarter. The increase was primarily due to market gains of $16 billion, partially offset by $4.4 billion in net outflows.
Franklin Resources, San Mateo, Calif. reported $749.9 billion in assets under management, up 6.1% from the previous quarter, which the company attributed to $40.8 billion market gains and $2.9 billion in net inflows.
“If you kind of go back to August of 2011, which is kind of the most recent trough, if you will, and you look at the S&P, it's certainly had a pretty good run over that time period and yet we haven't seen that translate into this whole rerisking dynamic that people have been talking about and speculating about for the last year and a half,” said Mr. Kim of Sandler O'Neill.
“Even assuming more favorable markets and the economy continues to improve, it's going to be a very gradual and measured timeline in terms of allocation,” Mr. Kim said.
Despite the hesitancy to re-enter the equity markets, the third quarter still had more investment activity than the second quarter, particularly from institutions, according to Robert Lee, New York-based analyst with Keefe, Bruyette & Woods.
“If you're an institution you can't sit around and do nothing. If you're trying to reach a certain bogey, sitting around and not doing anything is not an option,” Mr. Lee said. “An individual can stuff a mattress for the rest of his life. It may not be the right thing to do but he can do it.”
Looking ahead to the fourth quarter and beyond, Gabelli's Mr. Sykes cited the possibility of potential corporate tax rate changes as something that could contribute to managers' earnings.
“Whether it's Obama or Romney, both have mentioned they may look to lower the corporate tax rate, and given that most of the asset managers pay full taxes, that is an industry that would benefit indirectly from tax policy changes should that occur,” said Mr. Sykes.
Performance fees might also contribute to earnings margins after the fourth quarter, according to Mr. Sykes.
“As the market is higher now than at this time a year ago, there could be some optimism on performance fees in relation to their earnings margins,” he said. n
This article originally appeared in the October 29, 2012 print issue as, "Market pushes manager assets up as inflows remain low".