Interest rate, market concerns subdue asset gains for firms

Money management firms saw mediocre asset gains during the second quarter as choppy equity markets and uncertainty over interest rates had investors seeking the security of cash.

Money managers are "doing pretty well if they kept (assets under management) flat," said Robert Lee, managing director of equity research at Keefe, Bruyette & Woods Inc., an investment bank in New York.

"If the markets stay weak, that puts some pressure on asset levels, and translates into pressure on revenue and operating margins."

"After a couple years of strong market appreciation … investors are facing losses and going back to cash for a while," said Matt Snowling, senior analyst at Friedman, Billings Ramsey, an investment bank in Arlington, Va. "Although (managers) can tread water for a while, it's hard to continue in a choppy market."

A few managers reported profitability declines in the quarter ended June 30 — Janus Capital Group, Denver, for example, dropped 12%, while Waddell & Reed Financial Inc., Overland Park, Kan., posted a $33 million loss driven partly by a market-timing settlement charge. But most saw nominal growth in assets under management, increases that generally ranged anywhere from 0.03% at T. Rowe Price Group Inc., Baltimore, to 3% at Nuveen Investments Inc., Chicago.

The largest reported asset gain among publicly traded companies came from one of the smallest managers in the bunch. Officials at The Phoenix Cos. Inc., Hartford, Conn., said assets under management jumped nearly 17% quarter over quarter to $43.3 billion as of June 30, thanks to improved performance.

Among other managers, Barclays Global Investors, San Francisco, saw its profit leap nearly 50% for the 12 months ended June 30, thanks to strength in its active and iShares exchange-traded fund businesses. The manager had $1.6 trillion in assets under management as of June 30, up 7% from Dec. 31.

"Our strategy of carefully building selected business is paying off," Robert Diamond Jr., president of parent Barclays PLC, London, said in an earnings statement.

Not all executives were as upbeat. Raymond A. "Chip" Mason, Legg Mason Inc.'s chairman and chief executive officer, bemoaned current conditions during a news conference, noting the latest quarter was "one of the more challenging we've seen." Legg Mason's assets under management were $854.7 billion as of June 30, sliding 1.5% from the previous quarter.

Federated Investors Inc., Pittsburgh, is one manager that could fight off pressure if the Federal Reserve takes a breather from interest rate hikes, analysts said. Money market assets made up 75% of Federated's $210.5 billion in assets under management as of June 30.

"We continue to expect that a Fed pause and rate increases will be beneficial to our money market business," said Christopher Donahue, Federated's president and CEO, during a second-quarter earnings conference call.

Aside from the volatile equity markets interest-rate uncertainty, asset managers are dealing with a variety of issues that put dents in their quarterly earnings stat ements.

For example, Legg Mason and BlackRock Inc., New York, are working to soak up their respective acquisitions of Citigroup Asset Management and Merrill Lynch Investment Managers. But until transitions are complete, clients are "nervous" about committing money to the firms, said Rachel Barnard, an analyst at Morningstar Inc., Chicago.

For its part, Legg Mason bled out some $6.5 billion in client assets. BlackRock's assets came in at $464.1 billion, up $1 billion from the prior quarter. But the fixed-income firm had $447 million in net outflows after search activity slowed and four clients made policy and investment strategy changes.

Meanwhile, a damaged brand plagued at least one firm. Janus has toiled since its growth equity-investing style lost favor during the 2000-2002 bear market, and it got caught in the market-timing scandals. Assets under management at the firm were $154 billion as of June 30, down 3% from the previous quarter and 61% from the height of the bull market in 2000. Excluding Janus' subsidiary Enhanced Investment Technologies Inc., or INTECH, Janus' long-term net outflows totaled $3 billion in the second quarter, thanks partly to a client exodus from the firm's small-cap value products.

Also frustrating for the firm is that improving performance is not helping to curb outflows. About 64% of all Janus funds are beating their peers on a five-year total return basis as of June 30, up from 33% last year, based on Lipper rankings.

On the upside, analysts said AMVESCAP PLC, London, is showing signs of improvement under President and CEO Martin Flanagan, who has been in command for about nine months. Assets under management grew 0.7% in the second quarter to $413.8 billion, helping to reaffirm analysts' confidence. The recent acquisitions of financial restructuring group W.L. Ross & Co. as well as exchange-traded fund operator PowerShares Capital Management LLC broaden the company's business and give it more clout as a leading global asset management firm, analysts said.

"(Mr.) Flanagan seems to be digging in his heels and getting some traction on changes" at the firm, which has suffered significant outflows in previous years, Ms. Barnard said .

"All-weather" managers such as Nuveen Investments, T. Rowe Price and Franklin Resources Inc., the San Mateo, Calif-based parent of asset manager Franklin Templeton Investors, are well positioned too, given their diverse base of offerings, Ms. Barnard said.

For example, Franklin Resources' $490.1 billion in assets under management as of June 30 is made up of equities, fixed-income, hybrid and money market assets. It also has developed a strong international business, with global and international equity assets accounting for 43% of total assets under management, according to a news release. That is up from nearly 40% last year.