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Money Management

Continued outflows, ETF woes confronting new SSGA leader

Cyrus Taraporevala said plan sponsor derisking has contributed to outflows.

The new head of State Street Global Advisors faces several key challenges, including stemming several consecutive years of institutional outflows as well as making its ETF business competitive by introducing new offerings and keeping costs low, industry sources said.

In the Boston-based money manager's favor, strong markets and acquisitions, including the 2016 acquisition of GE Asset Management, have led to consistent growth in SSGA's assets under management. But the institutional outflows can't be ignored.

"The sky isn't necessarily falling, but it is a negative trend that has been persisting," said Brian Kleinhanzl, a managing director and equity analyst with Keefe, Bruyette & Woods Inc., New York. "Their AUM growth has just been market appreciation and acquisitions. So if the trend persists and markets don't cooperate, it's going to be a problem."

Cyrus Taraporevala, who was named president and CEO of SSGA on Nov. 7, declined to comment on his plans for moving the company forward. He is replacing Ronald P. O'Hanley, who was named president and chief operating officer of parent company State Street Corp. (STT) Mr. O'Hanley eventually will become State Street CEO after current chief Joseph L. "Jay" Hooley retires at the end of 2018.

SSGA had $2.673 trillion in assets under management as of Sept. 30.

In an emailed response to questions, Mr. Taraporevala said that despite the institutional outflows, the firm is seeing capital flowing into other parts of the business, including smart beta, active equities such as quant and fundamental, target-date funds and other multiasset solutions, and fixed income.

Based on its earnings statements, SSGA's institutional business has had quarterly net outflows since the fourth quarter of 2014, when the company began disclosing them.

For the full year, SSGA experienced $42 billion in net outflows in 2016 and $151 billion in net outflows in 2015. Year-to-date in 2017, SSGA has experienced $64 billion in net outflows.​

In the quarter ended Sept. 30, SSGA reported $39 billion leaving largely passive institutional mandates, primarily equity strategies. However, those outflows were partially offset by $12 billion of inflows into cash $2 billion into exchange-traded funds, SSGA said.

As one of the largest ETF providers in the world, SSGA has been lagging its peers in asset growth and flows. Data from Morningstar Inc. show SSGA had $605.4 billion in ETF assets as of Sept. 30, up 3.7% from June 30 and up 22.6% from the year-earlier date.

By comparison, Vanguard had $837.8 billion in ETF AUM, up 7.4% from the previous quarter and up 36.6% from Sept. 30, 2016. BlackRock (BLK) Inc. (BLK)'s iShares business had $1.66 trillion, up 7.3% from June 30 and up 31.7% from Sept. 30, 2016.

Cumulative net cash flows into ETFs as of Sept. 30 since 2010 were $186.4 billion for SSGA, $576.7 billion for Vanguard and $803 billion for iShares, according to Morningstar.

Stephen Biggar, director of financial institutions research at Argus Research Inc. in New York, said that while SSGA's institutional outflows are being offset by market appreciation, the company can't rely on markets remaining positive.

"It's been a trend they've been dealing with for many quarters now," Mr. Biggar said, referring to institutional outflows. "But the longer that trend goes on, it'll become more of a headwind."

If SSGA wants to maintain or improve its market share and keep its asset base growing, Mr. Biggar said the firm will need to "keep costs low and maintain strong partnerships," as well as engage in "strong product innovation."

In a note to investors, Morningstar analyst Greggory Warren said: "State Street's asset management operation … has struggled to adjust strategically as industry pricing has marched ever lower. Moreover, it is heavily concentrated in products … which are easily copied and vulnerable to swings in investor preferences."

Mr. Warren added he believes "State Street will continue to lose share among investors to whom price is paramount, but should stem outflows from those willing to pay a premium for liquidity and product breadth."

Argus' Mr. Biggar noted that more money is flowing toward BlackRock's low-fee index strategies than SSGA's, "so that's been a bit of a headwind as well."

Mr. Kleinhanzl said pricing is a big reason SSGA is behind its competitors.

"State Street is above peers in terms of price. If you think about their SPDR (ETF) product alone, it's priced well above its peers, and that's going to affect its institutional business," the KBW analyst said.

Revenue generators

Ultimately, Mr. Hooley said on SSGA's Oct. 23 earnings call, that while money is flowing out of institutional mandates, it is flowing into strategies that tend to generate greater revenue.

During State Street's earnings call on Oct. 23, Mr. Hooley said client capital is "shifting out of lower revenue generating assets and into higher generating revenue assets … which results in management fees up 14% and AUM up 9%" for the year.

He added that "it's been part of our strategy to focus on the higher-revenue-generating asset pools."

Mr. Taraporevala, in his emailed response to questions, said that SSGA's institutional assets are heavily weighted toward defined benefit plans and sovereign wealth funds in terms of clients and to equities in terms of asset classes.

The newly appointed CEO added that year-to-date, the asset management business has seen net outflows related to plan sponsors derisking and withdrawals from sovereign wealth funds because of low oil prices.

"Some of our clients have also been engaged in strategic asset allocation rebalancing away from equities due to the strength of global stock markets," Mr. Taraporevala said, noting the majority of SSGA's institutional outflows came out of lower-fee equity index mandates.

Added Mr. Taraporevala: "Our ETF franchise continues to experience healthy net inflows, with a significant share of these flows from institutional buyers. In a similar vein, our institutional cash business is experiencing net inflows."

State Street lagging in ETFs
Cumulative ETF cash flows since 2010, in billions.