Asset inflows improved for many of the largest publicly traded money managers in the third quarter, but analysts said institutional investors continued to hold off on new mandates.
“Generally speaking, institutional investors are kind of on the sidelines,” said Michael Kim, an analyst with Sandler O'Neill & Partners LP in New York. “There is not a lot of replacement activity; we do not see a tremendous amount of money being moved.”
Among those companies experiencing overall net inflows for the three-month period ended Sept. 30 were BlackRock Inc., T. Rowe Price Associates Inc., BNY Mellon Asset Management, Franklin Resources Inc. and Affiliated Managers Group.
Analysts and CEOs of money management companies expressed optimism that institutional investors will be forced to take more risk in 2011, moving out of lower-fee passive strategies and into higher-fee active investment strategies in an attempt to improve returns.
“Given the liability for most investors, a 3% or 4% return is not going to do it,” said. Robert Lee, analyst with Keefe, Bruyette & Woods Inc., New York.
Laurence Fink, BlackRock's chairman and CEO, emphasized the same theme as he announced the company's third-quarter results. In a conference call with analysts on Oct 20, Mr. Fink said he believes institutional investors will have no choice but to invest in new strategies that carry volatility and take more risks to pay their liabilities. “So if one believes we're going to have a persistence of low rates for a while globally ... and this is the type of conversations we're having with foundations and endowments, they're going to have to allocate more to equities and alternatives,” he said. “So these are very difficult conversations.”
Mr. Fink said he also expects pension officials to increase risk levels.
New York-based BlackRock reported assets under management of $3.446 trillion as of Sept. 30, up 9% from the prior quarter and 140% from the year-earlier quarter, ahead of its Dec. 1, 2009, acquisition of Barclays Global Investors. The roughly $295 billion gain in BlackRock's AUM from the prior quarter mostly came from $212.5 billion in market-related gains and $67.3 billion of foreign exchange-related gains. Net inflows were $15.6 billion.
However, based on flows by asset class, Black Rock lost some of its more profitable business in the third quarter. Active equity strategies — which generate higher fees — accounted for $15 billion in outflows. Passive equity strategies, which are index-based and have lower fees, saw inflows of $6 billion.
In fixed income, BlackRock saw $31.6 billion of inflows into less lucrative passive products, while higher-fee-generating active bond strategies had $8 billion in outflows. Also, BlackRock's active quantitative strategies saw net outflows of $10 billion.
BlackRock also reported more than $24 billion in “concentration-related outflows,” reflecting efforts by some clients to limit their exposure to any single firm following the merger of BlackRock and BGI.
Ticonderoga Securities analyst Douglas Sipkin in New York downgraded BlackRock to “hold” from “buy” after the earnings report. He said inflows into active strategies at BlackRock have deteriorated since the company acquired BGI. “At some point, you can't overlook the active outflows,” he said.