The drop in the equity markets during the fourth quarter couldn’t dampen yearlong gains in assets under management for most large money management firms.
Although assets generally fell or were flat for all but a handful of the 13 large publicly traded money managers that had reported fourth-quarter earnings by Jan. 30, most experienced double-digit gains for 2007. Total assets under management were $10.1 billion, flat from last quarter.
Cash continued to be a large asset driver for some firms, a move that began in the third quarter, while bulge-bracket firms with diversified businesses were in position to ride out the tough equity markets, industry watchers said. For the companies that reported cash assets, holdings totaled $2.1 trillion vs. $1.99 trillion for the previous quarter.
The late-year losses were more than offset by strong equity markets in the first half of the year, said David Bauer, partner at consulting firm Casey, Quirk & Associates LLC, Darien, Conn. “Across the board, even in the third quarter, there were positive returns in every traditional asset class,” he said. The third quarter marked the onset of the credit crunch that led to heavy write-downs across the financial sector.
BlackRock Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp., all in New York, managed to increase assets in the fourth quarter despite turbulent markets. BlackRock posted a gain of 4.4% for the quarter, with assets totaling $1.4 trillion. Over the year, assets were up 20.6%. JPMorgan reported assets of $1.2 trillion, an increase of 2.6% from the previous quarter and 17.8% for the past year. BNY Mellon reported assets of $1.1 trillion, up 1% for the quarter and 12% for the year.
9% increase
Federated Investors Inc., Pittsburgh, benefited from inflows into its money market accounts, with its fourth-quarter asset increase of 9% being one of the largest among the major money managers. For the year, assets were up 27%. Money market assets reached $236.6 billion at year-end 2007, up 36% from 2006 and 13% from the previous quarter. Christopher Donahue, chief executive officer, said in a news release that the increase was “unprecedented.”
Poor recent performance in the equity markets forced managers to combat drops in asset value by increasing new business inflows. With many retail investors looking to cash as a safe haven, managers with large money market operations gained a lot of assets in the second half, said Craig Siegenthaler, an asset management analyst at Credit Suisse Group, New York.
2007 was a record year for money market inflows, with $720.4 billion going into these vehicles vs. $315.1 billion in 2006 and $97.7 billion in 2005, according to data by AMG Data Services, Arcata, Calif. In the fourth quarter, $272.4 billion was pulled in, while the third quarter drew $319.4 billion.
And that trend is continuing. In the first three weeks of 2008, the domestic equity markets were pummeled by fears of a looming recession. From Jan. 2 to Jan. 23, investors poured $116.9 billion into money market accounts, according to AMG.
Janus Capital Group, Denver, was one of the only firms hurt by outflows of cash. The firm reported $206.7 billion in assets under management for the fourth quarter, down slightly from the third quarter but up 23.3% for the year. The drop in assets was due to $5.7 billion in money market outflows, offset by $3.2 billion in net inflows and $1.2 billion in market appreciation. In the third quarter, Janus’ money market assets increased 78%, or $8.1 billion, to $18.5 billion.
Money managers shouldn’t count on cash inflows lasting down the road. “Cash is not a permanent safe haven,” said Casey Quirk’s Mr. Bauer. Firms with a broad set of investment products, especially those with alternative asset classes on their roster, will benefit most, he said.
Indeed, BlackRock reported a 58% quarterly increase in alternative investment assets propelled by the $21.9 billion that came from closing the fund-of-funds acquisition of Quellos Group LLC, New York. For the year, BlackRock’s alternatives assets were up 48% to $313.3 billion and cash management was up 33% to $71.1 billion.
Alternatives still only represent 5% of the firm’s total assets. Chairman and CEO Laurence Fink said in a conference call on fourth-quarter earnings that he wanted alternatives to eventually make up 7% to 10% of the firm’s total assets.
Among other firms reporting was Legg Mason Inc., Baltimore. The firm reported assets under management of $998.5 billion as of Dec. 31, down 1.3% from the prior quarter but up 5.7% from the year before. In an earnings conference call on Jan. 30, newly appointed President and CEO Mark Fetting and Chairman Raymond “Chip” Mason said the fall in fourth-quarter assets reflected net client outflows of $9.1 billion and market depreciation of $4 billion.
They cited continued underperformance at key equity-focused subsidiaries Legg Mason Capital Management and Clearbridge as a factor behind net equity outflows of $10.6 billion for the quarter. Mr. Mason called the performance woes “a perfect storm.”
Market depreciation
In other reports, AllianceBernstein Holding LP, New York, reported $800 billion in assets under management for the fourth quarter, down 1.6% from the previous quarter but up 12% from a year ago. The drop was due largely to market depreciation, according to a news release. Institutional assets were $508 million, down 1% from $513.3 million last quarter.
State Street Corp., Boston, reported $1.98 trillion in mid-January, down less than 1% from the previous quarter and 13% higher than a year earlier. Fourth-quarter earnings per share dropped to 57 cents, down 37% for both the quarter and the year. The decline in EPS was largely because State Street took a net after-tax charge of $279 million, announced earlier this month, to help set up a reserve fund to address legal exposure and other costs stemming from the underperformance of some of subsidiary State Street Global Advisors’ fixed-income strategies, said Ronald Logue, State Street chairman and chief executive officer, during an earnings call.
