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Money managers see some improvement in first quarter

As flows into active equity still lag, fixed income and alternatives show gains

Robert Lee
Robert Lee said the first quarter was challenging, and no manager had a ‘wow’ quarter.

Publicly traded money managers typically fared better in the first quarter of 2017 than the previous quarter, but managers are having a difficult time generating organic growth as flows into equity strategies falter.

Although actively managed fixed income, multiasset and alternatives strategies saw inflows during the first quarter, active U.S. equities had a rough time.

“Generally, Q1 was better than a difficult Q4, but many firms still faced challenges” in generating growth from existing lines of business, said Robert Lee, a managing director and analyst at Keefe, Bruyette & Woods Inc. in New York in a phone interview. “Fixed income did well, as did alternatives and multiasset class solutions. But active U.S. equities continued to struggle, no surprise there.”

Glenn Schorr, a senior managing director and a senior research analyst at Evercore Group LLC, New York, said something similar in a separate phone interview.

“Fixed income is still in inflow, as are multiasset and unconstrained products,” he said. However, “core U.S. equity products are still in a tough spot.”

The Evercore analyst added: “Active has done better since the election; 2015, 2016 were tough years.”

Of the 25 public money managers whose earnings Pensions & Investments tracked as of May 11, 19 experienced increases in assets under management in the three months ended March 31, while three — Federated Investors (FII) Inc. (FII), Affiliated Managers Group Inc. and Och-Ziff Capital Management Group LLC — suffered declines in AUM during the quarter.

AUM for three firms — Goldman Sachs Asset Management, The Blackstone Group LP, Oaktree Capital Management (OAK) LP (OAK) — remained flat for the period.

Jeffrey Levi, a principal at Casey Quirk, a practice of Deloitte Consulting LLP in Darien, Conn., said results for the first quarter were up “largely because of capital markets.”

KBW's Mr. Lee said, “Nothing in the quarter has eased investor concerns about industry growth.”

“No one had a 'wow' quarter,” he added.

Mr. Schorr agreed. “Nobody had great organic growth outside of BlackRock (BLK). Invesco (IVZ) was (also) positive. But most managers, particularly on the active side, were still negative.”

BlackRock Inc. (BLK)'s AUM as of March 31 was $5.42 trillion, up 5% from three months earlier — the largest quarterly increase among the firms tracked by P&I — and up 14% from a year earlier.

The world's largest money manager generated $80 billion in long-term net inflows in the first quarter, representing a 7% annualized organic growth.

“We believe that levering our global scale and technology, we can drive better outcomes for our clients and future growth for BlackRock,” said BlackRock Chairman and CEO Laurence D. Fink in an earnings call to investors on April 19.

Mr. Fink added in the call: “We're using our scale to build ... technology to optimize investment performance and outcomes for our clients.”

Mr. Fink also noted New York-based BlackRock plans to make some acquisitions “to further add opportunities that we have in technology,” but did not disclose details.

Invesco flows

Meanwhile, Atlanta-based Invesco (IVZ) Ltd. experienced long-term net inflows of $1.8 billion and total net outflows of $5.3 billion and an organic growth rate of 1% for the quarter.

“Our strong investment performance and our focus on providing outcome-oriented solutions to clients contributed to the strong long-term net inflows ... for the quarter,” said Invesco President and CEO Martin L. Flanagan in its earnings call on April 27.

Mr. Schorr noted that broadly speaking, alternative managers did well during the quarter. “Blackstone and KKR continue to put up great returns. Their flows are better; their returns are better.”

Although Blackstone's AUM of $368.2 billion as of March 31 was relatively flat from Dec. 31, its year-over-year AUM growth of 7% reflected $66.5 billion of gross inflows in the year, including $14 billion in the quarter ended March 31, its earnings report showed.

KKR & Co., meanwhile, reported $137.6 billion in assets under management as of March 31, up 6% from Dec. 31 and up 9% from a year earlier. The company attributed the AUM increase to new capital raised and an increase in value in its private equity and alternative credit businesses.

This is, in part, because alternative strategies — particularly real estate, private equity and infrastructure — did well in the first quarter, Mr. Schorr said.

The manager among those P&I tracks that saw the biggest decline in AUM on a quarterly basis was Och-Ziff, whose AUM fell 10.6% in the quarter.

The New York-based hedge fund manager's firmwide assets have fallen every quarter since the third quarter of 2015, following a joint investigation by the U.S. Department of Justice and the Securities and Exchange Commission. The investigation, which started in 2011, involved violations of the Foreign Corrupt Practices Act over bribes paid to Libyan officials by a subsidiary. The company settled charges Sept. 29, 2016.

More struggles

Och-Ziff wasn't the only manager that continued to face year-over-year earnings struggles.

Despite its AUM growing by 3% in the three months, to $740 billion, San Mateo, Calif.-based Franklin Resources Inc. experienced net outflows of $11 billion during the quarter ended March 31. That was its 11th consecutive quarter of net outflows for the firm, bringing the total outflows in that time to $141.7 billion.

During the firm's earnings call on April 28, Chairman and CEO Gregory Johnson expressed optimism regarding a possible turnaround on Franklin Resources' flows.

“We saw a number of encouraging signs with retail flow trends improving in some regions and funds returning to net inflows,” said Mr. Johnson, adding “investment performance strengthening ... is a positive sign for future flow trends.”

In a written commentary released April 28 reviewing the quarter, Mr. Johnson said “U.S institutional sales were at the highest level since December 2015,” but “institutional redemptions increased almost 40% this quarter leading to higher net outflows.”

This article originally appeared in the May 15, 2017 print issue as, "Managers see some Q1 improvement".