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Money Management

Surging markets, demand for alternatives boost assets

Craig Siegenthaler said a strong market and high demand for alternatives lead to gains.

Strong markets and high demand for alternatives and fixed income led to strong inflows among publicly traded money managers in the third quarter.

Not only were flows positive for several money managers during the quarter, but all firms saw upticks in their assets under management.

Craig Siegenthaler, an equity analyst and managing director at Credit Suisse in New York, said that flows on average are improving.

Another equity analyst, Robert Lee, a managing director at Keefe, Bruyette & Woods, New York, said BlackRock (BLK) Inc. (BLK)'s results certainly reinforced the ongoing trends of investors seeking exchange-traded funds, passive management and fixed income.

Fixed income is doing well, according to the analysts, for a few reasons. For one, active fixed income has performed better than active and passive equities. Plus, the fixed-income capital markets have expanded — there are more assets that generate decent spread to U.S. Treasuries.

Also, the 2000 and 2008 bear markets showed bonds are safer than stocks. Aging demographics also have played a role, as baby boomers are seeking yield.

"You've had a good market, so that helps assets," said Mr. Lee. "Depending on the manager, many had inflows. Asset levels were up."

Mr. Siegenthaler agreed a strong market was a major factor driving AUM growth and inflows. "We've had a nice backdrop for the equities markets," he said.

The Russell 3000 index rose 4.08% in the third quarter while the MSCI All Country World index rose 14%.

All of the 16 asset managers reporting as of Oct. 26 reported an overall increase in AUM for the quarter, according to Pensions &​ Investments' earnings tracker. Nine out of 15 managers experienced net inflows for the three months ended Sept. 30.

Northern Trust Corp., Chicago, does not report net inflows for its asset management business.

One firm to experience net outflows during the quarter was Baltimore-based Legg Mason (LM) Inc. (LM), which reported $754 billion in AUM as of Sept. 30, up 1.8% from the previous quarter despite experiencing net outflows of $1.2 billion.

Joseph A. Sullivan, Legg Mason president and CEO, said in a conference call to investors on Oct. 25 that this was due to a few of its affiliates.

For example, Legg's small-cap specialist Royce & Associates LP experienced $900 million in outflows, while global equity manager ClearBridge Investments LLC had about $300 million in outflows due to a reallocation from a $600 million brokerage late in the quarter.

Mr. Sullivan noted Legg Mason continues to see strength in fixed income, with $1.5 billion in net inflows. For the quarter, Legg Mason had about $4.8 billion in outflows from lower-fee, shorter duration fixed-income strategies, which was offset by about $6.3 billion in inflows, much of which was in Western Asset Management Co.'s core-plus and macro opportunities strategies.

Alternatives driving flows

Mr. Siegenthaler said in addition to strong markets, high investor demand for alternatives was another factor driving positive net flows.

"Alternatives have been driving flows for (Affiliated Managers Group) and Blackstone (Group)," he said, noting "about 40% of AMG's business is in alternatives." AMG is scheduled to report its earnings Oct. 30.

Other managers benefiting from growing demand for alternatives include Morgan Stanley (MS) Investment Management, which reported $125 billion in alternatives as of Sept. 30, up 3% from three months earlier and 7% from the year earlier. MSIM's alternative assets represented 28% of the firm's entire $447 billion in AUM.

And despite being one of the few managers that experienced overall net outflows, State Street Global Advisors had net inflows of $2 billion into alternatives.

At BlackRock (BLK), its iShares exchange-traded funds business drove inflows for the New York-based money manager, with long-term net inflows of $52.3 billion in the quarter. iShares assets totaled $1.64 trillion as of Sept. 30, up 7.2% from June 30 and up 31.2% from Sept. 30, 2016.

In a conference call to investors on Oct. 11, BlackRock Chairman and CEO Laurence D. Fink said the firm is seeing growth "across all (its) key product segments."

"We believe the revitalization of our active equity platform this year will drive better client outcomes in future growth for BlackRock," he added.

As part of BlackRock's long-term strategy of investing for growth, the company is focusing on such areas as factor-based investing, ESG and illiquid alternatives.

BlackRock's assets totaled $5.977 trillion as of Sept. 30, up 5% from June 30 and up 17% from a year earlier. Total quarterly net inflows of $96 billion included long-term net inflows of $76 billion, driven by $59.55 billion going to fixed income.

In terms of managers seeing inflows, Mr. Lee cautioned it's important to put the overall inflows in perspective because they can mean different things to different managers — depending on where the flows are going.

Because different investment strategies have different fee structures and margin constructs, where the assets are flowing can determine a manager's revenue and net income.

"The key thing about manager flows is the mix," Mr. Lee said. "It'll be very specific to each manager."

He cited BlackRock as an example. Despite experiencing strong inflows, BlackRock's fee rate has declined over the past year because its mix of inflows has shifted toward strategies with lower fees.

Still, BlackRock's revenues are growing, "which is what matters," Mr. Lee said.

Despite having a third of its AUM, J.P. Morgan Asset Management (JPM) had the same revenue as BlackRock. JPMAM is succeeding due in part to strong inflows in fixed income ($17 billion) and multiasset and alternatives strategies ($9 billion).

Another example of the importance of where the money is going could be seen at SSGA. Although the bank-owned Boston manager experienced $25 billion in net outflows, Joseph L. Hooley, chairman and CEO of parent company State Street Corp. (STT), noted in its Oct. 23 earnings call that while $40 billion went out of largely passive institutional mandates, SSGA saw $12 billion flow into cash and $2 billion into ETFs.

"So, it's out of the lower revenue into the higher revenue, which results in management fees up 14% and AUM up 9%," Mr. Hooley said in the call. "And that's not a one-quarter trend. We continue to see that, and it's been part of our strategy to focus on the higher-revenue-generating asset pools."

SSGA finished the quarter with $2.7 trillion in assets under management, a 2.6% increase from the previous quarter and a 9% increase from a year earlier, primarily driven by market appreciation as well as follow-on client wins from the acquired GE Asset Management business and higher-yielding ETF inflows, which come primarily from institutional investors.