Publicly held equity money managers barely eked out 1% net gains in assets under management in the second quarter's flat market, and some even experienced a net loss, financial reports for the period show.
"A dose of reality hit the market," said portfolio manager James Crawford of Trevor Stewart Burton & Jacobsen Inc., New York. The firm manages about $1.2 billion in equity and fixed-income assets.
But, bond manager Pacific Investment Management Co., Newport Beach, Calif., picked up more than $5 billion in net new business. Total assets increased 14.5%.
Investor favoritism for select large-cap stocks, the slowing of U.S. corporate profit growth and persistent concerns about financial stability in Asia dragged most equity indexes down from their first-quarter highs, portfolio managers say.
The Standard & Poor's 500 stock index was up 3.3% during the second quarter; the Russell 2000 Growth returned -5.7%; and the Morgan Stanley Capital International Europe Australasia Far East index was only up 1.1%.
The Lehman Brothers Government Corporate Bond Index was up 2.6%, due in part to low inflation and a stronger U.S. dollar, analysts say.
Franklin Resources Inc., San Mateo, Calif., saw total assets under management drop 2% to $236.6 billion during the company's fiscal third quarter ended June 30.
The Franklin Templeton Group, the asset management subsidiary of Franklin Resources, managed $106.6 billion in global and international equities as of June 30, a 5% drop from the $112 billion the firm managed in that asset class as of March 31.
The asset class represents about 45% of Franklin's total allocation; the Franklin Templeton Group has 69% in equities, 29% in fixed income and 2% in other instruments.
Most of the $6 billion in net decrease came from Templeton's retail mutual funds, said Denman Zirkle, Templeton executive vice president in charge of institutional marketing -- there was, for example, a $441 million decrease in the Templeton World Fund and about a $1.6 billion drop in the Templeton Foreign Fund.
"Institutional investors were putting more money in because there was a net increase in those funds. Those investors understand our philosophy that now is the time to buy undervalued companies," Mr. Zirkle said.
It's the second time in a year the Franklin Templeton Group faced a quarterly drop in net assets; it lost 9% in the company's fiscal first quarter, ended Dec. 31, following the eruption of the Asian financial crisis.
Franklin Resources reports having $240.5 billion on a monthly average in total assets.
Investment management fees grew 6% to $373.8 million and the company reported a 19% net profit margin on net income of $131 million. Diluted earnings per share were $.52 compared with $.50 for the preceding quarter and $.44 a year ago.
The company's operating revenue for the quarter was down nearly 1% compared with the preceding quarter.
About $1 billion in net new business helped Merrill Lynch & Co. Inc. squeeze out a $1.2 billion increase in total assets under management, effectively less than a 1% gain, to bring total assets to $489 billion.
The New York-based manager's overall mix is 50.1% equities and 49.9% fixed income.
"We had an inflow of new business in mutual funds and mandates on the institutional side," said Jeffrey Peek, executive vice president and head of Merrill's asset management.
Only about $200 million of total asset gains came from investment performance during the quarter.
"We are unhappy with the second quarter, but we're up $50 billion in the first six months, so we're pleased with that. And we are well-balanced in a unique way now, with Mercury, so in some markets we gained, and some we lost," Mr. Peek said.
Merrill's acquisition in the fourth quarter of 1997 of London-based Mercury Asset Management Group PLC provided Merrill with a base of non-U.S. products and services.
"In the last three or four weeks, there's been a pickup in our notified wins. In the U.S. and Europe and in Japan so far this year, we're up 40% in institutional," he said.
Diluted earnings per common share were $1.33, compared with $1.30 per common share in the first quarter. Asset management and portfolio fees increased 3%, to $1 billion for the quarter, up 52% from June 30 of last year.
Fees now represent nearly 11% of total revenue, compared with 8% a year ago.
Net earnings rose 5% to $545 million during the second quarter, with diluted earnings increasing to $1.33 per share from $1.30 per share in the first quarter.
Second-quarter results include costs related to the new private client business in Japan, Merrill Lynch Japan Securities Co.
PIMCO Advisors Holdings LP experienced $5.8 billion in net cash inflows during the second quarter, which pushed total assets under management up 14.5% to $229 billion.
New business was won by PIMCO bond manager Pacific Investment Management Co. of Newport Beach, Calif., which has acquired 20 new, large institutional accounts since January, said William Cvengros, PIMCO Advisors' chief executive.
PIMCO is 60% invested in fixed income and 40% in equities. The equity allocation was only 26% until last fall, when PIMCO acquired New York-based Oppenheimer Capital, which specializes in domestic equity investments. The increased presence in equity helped push up the company's total assets, Mr. Cvengros said.
PIMCO Advisors Holdings reported net income of $19.4 million, compared with $16.5 million in the first quarter. Diluted earnings per share was 39 cents, compared to 34 cents in the first quarter.
Investment advisory fees for PIMCO Advisors LP increased 11.7% to $216.6 million, compared to the first quarter.
The holding company's retail product and mutual fund business now represents 34% of total assets.
Liberty Financial Cos. Inc., Boston, took a $1.5 million net realized investment loss for tax planning purposes, but still closed the second quarter with record net operating income of $31.2 million, compared with $30.1 million in the first quarter.
The company reported $54.1 billion in total assets under management, not even a 1% gain. Liberty's total assets apparently weren't profoundly affected by the launch of a large-company focus fund June 26, which raised $44 million, nor was the total greatly assisted by receiving the $175 million balance of a first-quarter collateralized bond obligation transaction.
Despite management's statement that there was strong sales in mutual funds, total fund assets are only up 5% since June 30 of last year. The holding company's affiliates are 63% invested in fixed income and 37% invested in equities.
Liberty's four investment management units now control about $5 billion in institutional assets.
Liberty is scheduled to make two acquisitions by the end of the year that will give it an additional $6.7 billion in institutional assets and $1.1 billion in mutual fund assets.
AFFILIATED MANAGERS GROUP
Affiliated Managers Group Inc.'s total assets under management grew 1% to $54.9 billion in the second quarter, compared with a 19% jump in total assets during the first quarter.
The company's 11 affiliates hold a composite mix of 84% equity, 4% fixed income and the rest in other instruments. About 38% of the total is invested globally; about 47% of AMG's total business is institutional.
AMG reported second quarter net income of $5.9 million, or 30 cents per share, compared with $4.5 million, or 25 cents a share, in the first quarter.
Revenue rose to $56.6 million from the first quarter's $45.7 million, up considerably from the $16.6 million AMG reported in the second quarter of 1997.
Nvest LP of Boston reported less than a 1% increase in total assets under management for the quarter, to $136 billion. Management and advisory fees increased 5% to $158.7 million in the first quarter.
Nvest's 15 affiliate companies have a composite asset allocation of about 47% equity, 41% fixed income, 7% money market and 5% real estate. Last year, Nvest increased its composite equity allocation to 47% from 42%, for the first time exceeding the fixed income allocation.
About 62% of Nvest's investment accounts are institutional.
The holding company reported a 27% increase in operating cash flow, at $39 million, compared with the same period last year, and a 5% increase from last quarter's $37.8 million. Net income was up 4% to $28 million.