Good news for asset managers

Publicly traded asset management firms are thriving once again, driven by the 2003 stock market rally and huge net inflows into mutual funds.

While fund companies that have been implicated in the trading scandals have benefited less from these trends, few are suffering. In fact, the only fund companies to report a first-quarter loss so far are Janus Capital Group, Inc., Denver; Putnam Investments, Boston; and Banc of America Capital Management LLC, Charlotte, N.C.

Janus officials said last week that the company would take a charge of $59 million, or 21 cents a share, against first-quarter earnings because of its $226 million settlement with the New York attorney general, Colorado attorney general and the Colorado Division of Securities over allegations of trading improprieties. As a result, Janus posted a loss of $19.3 million, or 8 cents a share, in the quarter. Meanwhile, total assets under management rose to $145 billion as of March 31, up 9% from $132.7 billion a year earlier.

In a conference call, Janus Chairman and Chief Executive Officer Steve Scheid said of the settlement: "I realize that this comes at a cost to the company, but I do believe it gives us an opportunity to move forward. I also want to say on behalf of all of us at Janus that we deeply regret the loss of confidence to our shareholders, clients and employees, and we are dedicated to restoring the value in this company." Janus closed at $16.05 April 28, down slightly from its March 31 closing price of $16.38.

Long term, the settlement will have an almost negligible impact on the firm's profit, predicted Rachel Barnard, equity analyst at Morningstar Inc., Chicago. "It might reduce its profit by a few pennies, but it will be less than $1 a share. The firms that are profitable will still be profitable. These settlements aren't hurting them much," she said. She added that it's impossible to know what impact the scandals might have on firms that haven't yet settled the charges, but she doubted it would be substantial.

"It's an incredibly profitable business with fabulous margins, averaging 35% of sales. ... It's not capital intensive, and fees average 1% of assets, which is a great annuity, coming in year after year."

The scandal did affect Putnam's first quarter. In its recent earnings report, Putnam parent company Marsh & McLennan Cos. Inc., New York, noted that $110 million in regulatory settlements with the SEC and the Massachusetts secretary of state on market-timing issues and other related expenses reduced first-quarter net earnings by $59 million, or 11 cents a share. In addition to the $110 million in penalties (of which $10 million was paid in the fourth quarter), Putnam also paid $25 million in severance costs and $15 million in regulatory issue-related costs in the first quarter.

As a result, the Putnam unit posted a first-quarter operating loss of $26 million, compared with operating income of $103 million for the first quarter of 2003.

Barbara Perlmutter, Marsh & McLennan spokeswoman, said that Jeff Greenberg, chairman and CEO, had addressed the loss in the earnings release on April 21. He said at the time: "We are gratified that Putnam reached settlement agreements with regulators … a critical step in restoring investor confidence. We believe the changes Putnam is making will result in a strong organization, and we are positive about Putnam's long-term business prospects."

Putnam also reported that quarterly revenues increased 4% to $461 million, reflecting modest investment gains, compared with a loss in 2003. Average assets under management in the quarter were $234 billion, down 4% from $244 billion for the same period last year. Total assets under management slid 6% to $227 billion, down from $241 billion as of March 31, 2003. Marsh & McLennan closed at $45.14 April 28, down from $46.30 on March 31.

Morningstar's Ms. Barnard observed that these were one-time charges for Putnam. "The company was still profitable, with good operating margins, well above 20% for the year. They should be able to bounce back. The $110 million they had to pay in penalties was fairly modest."

Bank of America Corp. reported that it took a $285 million pre-tax charge in the first quarter to cover settlements for the mutual fund trading improprieties at Banc of America Capital, which negatively affected total earnings by 16 cents a share. In addition, the settlement reduced the asset management unit's pre-tax income by $142.5 million. Asset management earned $53 million in the quarter, down 62% from $139 million earned in the same period last year. Expenses increased 55% because of the professional and legal fees related to the inquiry, the company said. Yet the unit's revenue increased 15% to $669 million, from $586 million a year ago. And assets under management rose 14% to $337 billion.

"We're glad to have it behind us, said spokesman Robert Stickler. He wouldn't comment further.

Bank of America stock closed at $80.90 April 28, nearly unchanged from $80.98 on March 31.

Among highlights of other asset managers' first-quarter earnings reports:

-- Federated Investors Inc., Pittsburgh, said its first-quarter earnings included expenses of $4.3 million in connection with various legal, regulatory and compliance matters. Of that, $2.8 million was for an additional accrual of estimated costs for its internal review of past mutual fund trading practices. Federated reported total assets were $193.8 billion as of March 31, down $1.8 billion, or 1%, from $195.76 billion a year ago. Federated closed at $29.46 April 28, down from the $31.43 closing price on March 31.

-- AMVESCAP LLC, London, reported that assets under management rose to $381.4 billion as of March 31, up 20% from $318.5 billion a year earlier. Company officials also said profits before tax and goodwill amortization for the three months ended March 31 surged to $132.3 million, up 71% from $76.6 million for the period ended last year.

AMVESCAP closed at $13.57 April 28, down from $15.13 on March 31.

-- Franklin Resources Inc. said in its fiscal second-quarter earnings report that it would take a pre-tax charge of $60 million to cover costs related to probes into improper trading. The San Mateo, Calif., company also reported that assets under management rose to $351.6 billion as of March 31, up 40% from $252.4 billion a year ago and up 4.4% from $336.7 billion in the previous quarter. The company also said sales exceeded redemptions by $6.5 billion in the quarter, compared with $7.4 billion in the previous quarter. It reported that net income in the quarter was $172.8 million, or 68 cents a share, up from $109.6 million, or 43 cents a share, a year ago. Franklin closed at $55.15 April 28, nearly unchanged from its end of quarter closing price of $55.68.

-- T. Rowe Price Group Inc., Baltimore, reported that net income nearly doubled to $77 million from $39 million, and earnings per share increased 91%, to 61 cents a share from 32 cents a share, thanks to strong net equity inflows and robust performance. Assets under management jumped 44% to $201 billion from $140 billion as of March 31, 2003. T. Rowe closed at $51.98 April 28, compared with $53.83 on March 31.

-- Alliance Capital Management Holding LP's assets under management were $484 billion, up 25.2% over a year ago, mainly because of equity market appreciation, company officials announced. At Alliance, New York, the institutional division experienced net asset outflows of $6.3 billion; net inflows to the private client and retail divisions were $1.6 billion and $1.2 billion, respectively.

Overall, Alliance's first-quarter diluted net income per share was 58 cents, up 56.8% from the same period last year.

Robert Lee, vice president and analyst at Keefe, Bruyette & Woods Inc., a New York investment banking firm, pointed out that Alliance shareholders suffered the most from the mutual fund scandals because the firm eliminated its fourth-quarter distribution when it took $300 million in charges to settle federal and state accusations of trading irregularities.

Alliance closed at $34.60 April 28, down from $36.80 on March 31.

Mr. Lee pointed out that Janus, Putnam and Alliance each had performance problems in the years preceding the scandals, and that the combination of the scandals and poor performance motivated investors to shift assets out of those firms. That resulted in higher net outflows than at other firms not implicated.

"Nevertheless, Alliance has been generating net positive inflows, boosted by a strong private-client high-net-worth business," Mr. Lee said.

Morningstar's Ms. Barnard added: "We expect (Alliance) to be profitable in the long term, once this is behind them. We think the stock is undervalued — it's been trading at $35 a share, and we value it at $43 a share."

All of the regulatory scrutiny in the last couple of quarters created a buying opportunity in the asset management group, said Robert Hansen, equity analyst at Standard & Poor's, New York. "It encouraged investors to re-evaluate the performance at those firms and to move their money to more diversified firms. Firms like Franklin Resources, Legg Mason (Legg Mason Inc.) and T. Rowe Price benefited."

He noted that inflows have been strong across the board, and that in the first quarter, firms received a total of $100 billion in equity net inflows, compared with $159 billion in equity net inflows for all of 2003.

"There was quite an acceleration in the fourth quarter of 2003 and the first quarter of 2004, with most of the money going into global and equity funds. The fees on those are two to the three times the fees for bond funds, which are 50 basis points, compared with 100 basis points for equity funds and 150 basis points for global funds, which also helped revenues."

Keefe, Bruyette's Mr. Lee added that even though Franklin has been under scrutiny, it's been affected less than other firms under investigation.

"It's a bigger, more diversified business, and a lot of its new money has been coming from outside the U.S. The investigations didn't hamper its ability to raise money," he said.

A lot of new money flowed into mutual funds during the quarter, with most of it going to equities, said Morningstar's Ms. Barnard. "Investors were embracing very conservative stock funds, a big departure from the go-go growth style they chose during the bull market.

"That particularly helped T. Rowe Price and Franklin, which posted exceptional quarters; they generated more new assets than any of their publicly traded competitors. Investors didn't seem to care or were apathetic about scrutiny over trading issues at Franklin," Ms. Barnard said.

Craig Woker, Morningstar financial services analyst who follows Bank of America, said it was surprising how little impact the trading scandal had on the company's asset management unit, beyond the $285 million charge that the parent company took. "The regulatory component is finished, but there could be a class-action lawsuit which could impact earnings later. Otherwise the unit benefited from the flows going into equities in general," he said.