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Money Management

Market increase not treating managers equally

Laurence D. Fink said ‘high anxiety’ still exists despite the high returns.

All firms gain assets, but some see outflows despite Q4 equity boost

Market appreciation led to strong revenue and healthy asset growth for most public money managers during the fourth quarter.

Despite this appreciation, however, some managers still experienced weak or negative net flows.

"Revenue growth and fee growth is still healthy, attributable to rising AUM," said Andrew Disdier, director, equity research at Sandler O'Neill + Partners LP, New York. "Yet we're still seeing net redemptions. It's an interesting dynamic."

Mr. Disdier attributed this dynamic to "a function of the market backdrop." In other words, from a mathematical standpoint, performance of the underlying assets are "more than making up" for the outflows, he said.

During BlackRock (BLK) Inc. (BLK)'s Jan. 12 earnings call, Chairman and CEO Laurence D. Fink said: "Equity markets reached an all-time high in 2017, driven by synchronized economic growth around the world."

Still, Mr. Fink noted: "We are seeing a paradox of high returns, and yet we still see high anxiety," with the investment industry ​ maintaining "a continued focus on downside risk, putting a premium on lower-risk bonds, anchoring interest rates at historical low levels and driving many investors to overallocate to cash and to other safe havens."

All 16 publicly traded asset managers reporting as of Feb. 1 showed an overall increase in assets under management for the quarter. Twelve out of 15 managers experienced net inflows for the three months ended Dec. 31. (Northern Trust Corp., Chicago, does not report net inflows for its asset management business.)

"The biggest story was the massive equity market tailwinds that all these companies experienced," said Christopher Shutler, an equity analyst at William Blair & Co., Chicago. "The market appreciation flows to the bottom line, so it's been a good year for these companies on a revenue growth perspective."

Mr. Shutler also noted that during the quarter, net flows were more mixed among firms that had passive exposure. For example, New York-based BlackRock saw "tremendous inflows," while firms that didn't have passive or rules-based exposures were more challenged, he said. BlackRock's long-term strategies experienced $80.6 billion in net inflows for the quarter.

"But the (overall) flow trajectory saw improvement in the fourth quarter and all of 2017," Mr. Shutler added.

Best in 5 years

T. Rowe Price Group Inc., Baltimore, in 2017 saw its best year of inflows in five years due to a mix of "strong investor sentiment around the equity markets," the distribution efforts "that the company has put in place over the past few years" and "exceptional performance," Mr. Shutler said.

Affiliated Managers Group Inc., West Palm Beach, Fla., saw inflows of $1 billion in the fourth quarter — compared to net inflows of $3.1 billion for the third quarter of 2017 — due to "seeing very good momentum in their more quantitative strategies," Mr. Shutler said. He added the firm also "has good exposure to alternatives, including private equity," through its affiliates.

Invesco (IVZ) Ltd. also saw modest inflows compared to the previous quarter. The Atlanta-based manager reported net inflows of $2.7 billion for the fourth quarter, after experiencing net inflows of $11.5 billion for the third quarter. And while Baltimore-based Legg Mason (LM) Inc. (LM), reported $2.2 billion in long-term net inflows, net outflows totaled $100 million for the quarter.

Meanwhile, OM Asset Management PLC, Boston, Franklin Resources Inc., San Mateo, Calif., and Federated Investors (FII) Inc. (FII), Pittsburgh, experienced net outflows of $3.7 billion, $2.3 billion and $1 billion, respectively, for the fourth quarter of 2017.

Analysts with whom Pensions & Investments spoke noted that illiquid assets, exchange-traded funds and active fixed-income strategies continued to be strong for the quarter, while active equity remained weak.

"We've seen more of the same in the major assets," said Craig Siegenthaler, an equity analyst and managing director at Credit Suisse Group in New York.

Although money continued to leave active equity strategies, strong markets caused active equity flows to improve by about $200 billion across the industry for the full year, which surprised industry observers, Mr. Siegenthaler said.

Also, active performance saw substantial improvement in 2017, with 49% of all active equity managers outperforming their benchmarks after fees.

"That's a good year," said Mr. Siegenthaler. "The longer-term average is in the low 40s."

'A kitchen-sink quarter'

In a note to investors published on Jan. 7, Robert Lee, a managing director and equity analyst at Keefe, Bruyette & Woods Inc., New York, called the fourth quarter of 2017 "a kitchen-sink quarter," with "flows at many firms (remaining) lackluster with weak domestic equity flows being at least partially offset by flows to fixed income, global and non-traditional/alternative strategies.

The fourth quarter also saw the passage of the Tax Cuts and Jobs Act of 2017, which analysts said they believe will help managers' bottom lines for 2018. "Their tax rate went down a lot, and their earnings (estimates) went up a lot," explained Mr. Siegenthaler.

In terms of what the managers plan to do with these tax cuts, several are saying they're determining that now, but will most likely use them to reinvest in the business, buybacks and dividends.

For example, T. Rowe Price said in its earnings statement released Jan. 30 that the firm "is carefully evaluating the impact the U.S. tax reform will have on the firm, and factoring in the potential investment, operating expense and capital management implications."

Gary S. Shedlin, BlackRock (BLK)'s chief financial officer, said during the firm's earnings call that the "plan is to effectively reassess our latest capital management recommendations, probably around midyear, once we kind of finalize the impact the tax reform is going to have on BlackRock."

On the topic of the tax cut, KBW's Mr. Lee wrote: "What the ultimate impact of tax reform and where future tax rates will settle out for each firm remains a work in progress."