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Money Management

Equity markets fuel majority of AUM gains

Manager assets jump despite pressure over fees, passive advance

Craig Siegenthaler
Craig Siegenthaler saw more demand for active management.

Rising equity markets helped boost assets under management for publicly traded money managers in the second quarter, countering industry trends such as continuing outflows from active U.S. equity strategies and pressure from investors to reduce fees.

The Russell 3000 index tracking domestic equities rose 3.02% in the second quarter while the MSCI All Country World index was up 4.8%. But over the first six months of the year, the Russell index was up 8.93% and the MSCI index was up 12.36%

The results are part of a continuing buildup of managers' assets since the November election of President Donald Trump. As of June 30, equity analysts who follow publicly traded managers say things are better than originally thought.

"Heading into the year, we all thought 2017 was going to be to be a really bad year," said Craig Siegenthaler, a managing director and equity analyst at Credit Suisse, New York.

Mr. Siegenthaler said not only have equity markets helped AUM growth, but most firms also experienced overall inflows in the latest quarter. "There's a been a stronger demand for active than we thought," he said.

"BlackRock (BLK), positive flows; T. Rowe Price, positive flows; Legg Mason (LM), positive flows; Invesco (IVZ), positive flows — they actually haven't been doing that bad." He said the impact of the Department of Labor fiduciary rule, while resulting in some outflows, did not have as large an impact as originally thought on redemptions from active strategies.

Of the 28 asset managers reporting as of Aug. 4, 22 reported an overall increase in AUM, according to Pensions & Investments'earnings tracker. Most managers also had ​ net inflows.

The leader was BlackRock Inc. (BLK), which reported net inflows of $93.5 billion in the quarter, the third straight quarter with inflows of more than $80 billion. Net exchange-traded fund inflows from the company's iShares group were particularly strong at $76 billion, higher than the record $65 billion in the previous quarter.

Overall assets under management at BlackRock of $5.69 trillion were up 5% from three months earlier and up 16% from a year earlier. Despite the latest bump, BlackRock was one of several asset managers that saw their stock price drop.

BlackRock was trading at $438.34 per share on July 14. After the July 17 earnings release, the stock closed at $424.63, a 3.1% drop. It closed Aug. 4 at $426.51.

"BlackRock had a really strong first half of the year but the stock didn't have the best reaction," Mr. Siegenthaler said. "Their AUM growth had been strong but their revenue growth and the earnings growth have been slower because you've seen their fee rate come down."

BlackRock's revenue was $2.97 billion in the second quarter, up 5% from the previous quarter and up 6% from the second quarter of 2016. Net income was $857 million in the second quarter, down 1% from the prior quarter but up 9% from the same period a year ago.

Despite any blips, analysts remained overall bullish on BlackRock. Greggory Warren, senior stock analyst at Chicago-based Morningstar Inc., noted in a July 17 report that BlackRock has key advantages over other asset managers.

"The size and scale of its operations, the strength of its brands and the diversity of its AUM by asset class, distribution channel, and geographical reach provide it with a leg up over competitors," he said.

Mr. Warren noted that BlackRock was in a good position to capture flows into passive strategies and ETFs. He said passive strategies accounted for two-thirds of the firm's AUM, and iShares had the largest ETF market share in the U.S. and the world at 38% and 37%, respectively.

BlackRock not immune

But even BlackRock (BLK) wasn't immune to redemptions in its active U.S. equity strategies, with $7.6 billion in net outflows in the quarter. Other managers with net outflows from active U.S. equity strategies were Affiliated Managers Group Inc., at $3.2 billion, and Franklin Resources Inc., at $900 million.

Franklin had an even larger net outflow of $6 billion in overall global equities strategies. Invesco (IVZ) Ltd. reported $4.6 billion in overall active equity outflows, according to data analyzed by Christopher Shutler, an equity analyst at William Blair & Co., Chicago.

Gregory Johnson, Franklin Resources chairman and CEO, said in a July 28 call with financial analysts that its $3 billion of the $6 billion in redemptions were from three institutional investors, the largest from a sovereign wealth fund. He did not identify the investor or the individual amounts of the redemptions.

Mr. Johnson said getting back to the larger historical gross sales levels for active equity funds is "difficult," given "the pressure of indexing happening and replacing the traditional fund."

Mr. Shutler said investment performance improved for active equity managers in the first half of the year, with many surpassing their benchmarks. But he noted the trend toward passive equity strategies continues, and said "six months doesn't make up for several years of underperformance.

He also said investors are putting fee pressure on active managers; "there are too many managers, and fees are compressing as a result," he said.

A better position

Robert Lee, a managing director and equity analyst at Keefe, Bruyette & Woods Inc., New York, said publicly traded managers with large diversified platforms are in a better position than firms with primarily large active equity franchises.

"What you've seen this quarter is those companies that have a more global product set and a more global footprint, good fixed-income franchises, some alternatives — they have tended to weather the headwinds a little better, at least from a new-business perspective," Mr. Lee said.

He cited AMG, which holds stakes in more than 30 boutique management firms, as an example of a firm that has been able to leverage a push by institutional investors for more alternative investment strategies.

Despite its $3.2 billion in U.S. equity outflows in the quarter, AMG had $4.7 billion in net alternatives inflows, its earnings statement showed. Those inflows more than offset the equity outflows, resulting in an overall $1.8 billion of net inflows for the quarter, said Sean M. Healey, chairman and CEO, in a July 31 earnings release.

Mr. Lee said 39% of AMG's AUM is made up of strategies using some form of alternatives. "One of the advantages they have is a lot of affiliates that manage different types of alternative strategies," he said. "Their affiliates in aggregate have a broader range of non-traditional strategies than your typical asset manager."

Another manager boasting inflows in its alternatives strategies was Invesco (IVZ), which reported $2.4 billion in net inflows into its $116 billion alternatives franchise. Mr. Shutler said those inflows helped counter the more than $4 billion of active equity outflows, reducing net outflows to $600 million in the June 30 quarter.

Biggest drop

But Invesco (IVZ) stock also saw the biggest drop of any asset manager after its July 27 earnings release. The stock closed down 5.1% from its $36.44 share price on the previous day. The stock closed at $34.54 on Aug. 4.

Mr. Shutler attributes the decline to guidance from Invesco's management that it will be seeing a 40% to 50% incremental adjusted operating margin over the next 18 months compared to 50% to 65% previously. He said the drop in margin is because investments in various areas including institutional distribution, investment solutions, Jemstep Inc. (the firm's robo-adviser) and the April announcement that it is buying Source U.K Services Ltd., a European ETF provider, from private equity firm Warburg Pincus LLC for an undisclosed sum.

Invesco's spending is part of a trend by asset managers to fund future growth, said Glenn Schorr, a senior managing director and senior research analyst with New York-based investment research and investment banking advisory firm Evercore ISI.

He said other managers that announced in the last few months that they are making expenditures to build distribution, technology and new strategies include T. Rowe Price, Legg Mason (LM), Franklin Resources and Eaton Vance (EV) Corp.

"Expenses happen now and the benefits hopefully happen later," Mr. Schorr said.

The analyst said if it were not for the strong equity markets, the spending by asset managers would have a bigger impact on margins.