A silver lining in money managers' weak first quarter

Money managers have reported results for the latest quarter as bleak as any since the depths of the bear market in 2002, but research analysts said at this point the glass just might be half full rather than half empty.

Investors expected dismal numbers and they got them, but considerable rallies for money manager stocks in recent weeks might point to a pickup of confidence in the sector, said D.J. Neiman, an equity research analyst in Chicago with William Blair & Co.

For the latest quarter, a 10% drop in leading domestic stock indexes packed a double punch, reducing assets under management and leaving a number of firms reporting unrealized losses on the millions of dollars of their own money harnessed to seed new investment strategies, analysts said.

That market decline left the combined assets reported by 10 pure-play asset managers — Affiliated Managers Group Inc., AllianceBernstein Holding LP, BlackRock Inc., Calamos Asset Management Inc., Federated Investors Inc., Invesco Ltd., Franklin Resources Inc., Janus Capital Group Inc., Legg Mason Inc. and T. Rowe Price Group Inc. — at $5.3 trillion as of March 31, down 4.2% from the previous quarter.

Marc Irizarry, an equity analyst with Goldman Sachs & Co. in New York, said the fall in assets under management for the broader group of 13 money managers in Goldman’s universe that have reported so far was closer to 6%, the first general decline since mid-2002.

In the face of that general malaise, some managers held up pretty well, noted Robert Lee, an equity analyst with Keefe, Bruyette & Woods in New York. Among them, managers with big money market operations — including BlackRock and Federated — benefited from the flood of money seeking a safe harbor in liquidity offerings during the quarter, he said.

With net inflows of $35.2 billion and $38 billion respectively, BlackRock reported a 1% rise in assets under management from the prior quarter while Federated reported a 12% jump.

Mr. Lee also cited T. Rowe Price, which reported record net inflows of $9.7 billion for the latest quarter, even as $31 billion in market-related declines left its assets down 5.4% from the prior quarter.

By and large, though, declining markets dragged earnings and revenues lower for the sector.

Like Mr. Neiman, Mr. Irizarry pointed to unrealized losses on money that firms marshaled to seed new products as a major reason the net income they reported, on average, came in more than 15% below both Goldman’s and consensus market estimates.

Despite that backdrop, Mr. Irizarry noted that Goldman upgraded its recommendation recently for asset managers as a group, while boosting its recommendations for managers such as Janus and Franklin to a “buy” from a “hold.”

Following a period where earnings multiples for money managers had climbed to lofty levels, valuations for many firms have become attractive again, Mr. Irizarry explained. If and when investors’ appetite for risk picks up again, the underlying fundamentals will be compelling, he said.As tough as it was, the past quarter still left asset managers looking like one of the strongest bets in the financial services sector — straightforward, relatively transparent businesses that aren’t capital intensive, said Mr. Lee at Keefe, Bruyette.

This period of uncertainty should leave investors looking for financial stocks more eager to own asset managers, agreed Mr. Neiman. While those stocks are clearly affected when the market tumbles, investors don’t have to fear the billion-dollar write-downs announced by other financial firms during the past six months, he said.

Goldman’s Mr. Irizarry said another quarter as tough as the one just ended — in terms of market declines — is unlikely, raising the prospects of sequential gains for the three months through June. While nothing is certain, the environment for the sector is probably “close to a trough,” he said.

“If and when things eventually improve, the secular trends (supporting the industry) will still be there,” and it’s reasonable to argue that money managers will remain “one of the faster growing segments on a global basis,” said Mr. Lee.

Contact Douglas Appell at [email protected]