Money manager inflows, returns making for a strong beginning to 2011

Most major publicly traded money managers saw a boost in their assets under management and their profits in the first three months of 2011, driven by a robust equities market as well as positive inflows.

Total first-quarter AUM for the 13 publicly traded managers reporting as of April 29 was up 4% from the last quarter of 2010, according to a Goldman Sachs research report.

The winners and losers among publicly traded money managers are becoming more clearly defined as the market environment becomes less volatile and companies stand on their investment track records, said Michael Kim, New York-based analyst at Sandler O'Neill & Partners LP.

Among the winners in terms of asset growth, Mr. Kim counts Affiliated Managers Group Inc. and Franklin Resources Inc., which reported first-quarter AUM growth of 6.2% and 5%, respectively.

Both companies had even more dramatic AUM increases when looking at the year ended March 31, with 30.7% for AMG and 20% for Franklin.

Mr. Kim said the two companies' increases have been driven by positive performance across various asset groups.

On the other hand, he ranks Janus Capital Group among the losers because of poor performing equity strategies and funds. “Janus has had widespread performance problems,” said Mr. Kim.

Janus suffered net outflows of $2.7 billion for the first quarter of 2011, the seventh straight quarter of net outflows.

On a positive note overall, senior officials at money management firms and analysts said investors are taking on more risk and thus invested in higher-fee asset classes such as active equities and alternatives during the first quarter.

Craig Siegenthaler, an analyst with Credit Suisse, New York, believes the equity market rebounds have set the stage for continued growth in equity inflows for the second quarter and beyond.

“We expect the short-term derisking phase to transition back into a multiyear rerisking cycle given the near-term rebound in global equities,“ he said.

Those moves help money managers because active equity strategies command higher fees than passive investments.

“There are two camps: retail investors who are too afraid to do something and institutional investors who have to do something,” Goldman Sachs analyst Marc Irizarry said in an interview from his New York office.

He said institutional investors are more willing this year than last to put their money into riskier asset groups to try and make up for their previous losses.

Mr. Irizarry said that particularly benefited AMG, with its strong specialties in global emerging market equities and alternatives.

Indeed, AMG attributed 70% of its earnings to those two categories.

Higher inflows led to substantial gains in net income at AMG and other money managers in the first quarter.

AMG's net income of $39.1 million in the first quarter was up 123% from a year earlier. Franklin Resources reported a 41% increase from a year earlier, while BlackRock Inc.'s net income rose 34% year over year.

BlackRock Chairman and CEO Laurence D. Fink said in an April 21 conference call with analysts that investors have begun to “rerisk,” noting $2 billion in net inflows was plowed into single- and multistrategy hedge funds and real estate.

Money managers won't get the benefit of unbridled flows into these higher-fee asset classes because caution is still the keyword, said analyst Robert Lee with Keefe, Bruyette & Woods Inc. in New York.

“Institutional investors have to take some risk, but they are not necessarily going to buy aggressive growth funds,” he said. “They are investing in a more measured fashion.”

Mr. Lee said overall inflows could slow in coming months because investors often make investment decisions in the first quarter, leading to higher inflows in that quarter.

“If you look historically, the first quarter tends to be stronger than other quarters. There tends to be some seasonality,” he said.

Ultimately, he said, investors expecting that continued inflows will be a boon for money managers' bottom lines could be disappointed. “Unless the market can keep marching higher, it's hard to make a case that everything is going to accelerate,” he said.

Regardless, money managers have decided to use the increased profits they have earned so far to make capital investments, said Barclays Capital PLC analyst Roger Freeman, who is based in New York.

He said capital is being spent on new products, technology projects, international expansion and advertising and marketing, all parts of efforts to remain competitive.

“Money managers want to make sure they are well-positioned,” Mr. Freeman said.

AMG is one of the companies that is directing capital to international expansion. In a conference call, CEO Sean Healey credited the increase in inflows at AMG to the company's overseas expansion efforts, “This strategy is clearly working,” he said.

BlackRock's Mr. Fink didn't disclose how much it would cost his company, but told analysts in the conference call that BlackRock plans to build brand recognition worldwide.

“This is going to be a big and aggressive campaign over the next five years,” he said. “We believe this will demonstrate the growth of the platform, and it will allow us to continue to grow worldwide.”

BlackRock, the world's largest money manager, had net outflows in the first quarter of 2011. While its AUM increased $87.5 billion between the fourth quarter of 2010 and the first quarter of 2011, that was due to market gains of $100 billion. The company had net outflows of just more than $12 billion.

Analysts downplayed BlackRock's outflows, noting they were primarily low-fee cash management products, such as money markets. BlackRock reported in its first-quarter financial statement that it experienced net withdrawals of $24 billion from cash management products.

Credit Suisse's Mr. Siegenthaler said what is particularly positive for BlackRock is that outflows related to the company's 2009 acquisition of Barclays Global Investors are easing.

“It's happening several quarters earlier than we thought,” said Mr. Siegenthaler.

He said those outflows, which had occurred because investors didn't want their assets to be too concentrated with one manager following the merger, decreased 53% to $18.4 billion during the first quarter.

Lower-fee indexed assets continued to dominate the merger-related outflows, accounting for $10.8 billion of the $18.4 billion, BlackRock's financials show.

Mr. Fink said during the conference call that the outflows are expected to decline further in future quarters and the company will not need to continue to break them out.

“We believe this is principally over,” he said. “We are forecasting and telling you that there is in our pipeline another $9 billion (of merger-related outflows), but this reporting is over. It will all be net. We believe we can look forward to growth now, and we don't see any of the concentration issues that we had before.”

BlackRock wasn't the only money manager to have a strong quarter despite flow issues.

T. Rowe Price Group Inc., Baltimore, reported $5.8 billion in first-quarter inflows, down 16% from the fourth quarter of 2010.

The reduced inflows came despite $194.6 million in net income for the money manager for the first quarter of 2011, up 27% from the same period a year earlier.

Invesco Ltd., Atlanta also had flow issues, at least for analysts.

The company reported net income of $177.5 million in the first three months of 2011, up 87% from the same period in 2010. That dramatic increase was partly fueled by Invesco's purchase of Morgan Stanley's retail asset management business last June.

Invesco had $6.6 billion in net inflows in the 2011 first quarter, but analysts were concerned because $2.8 billion in outflows came from higher-fee equity products in the quarter.

In a conference call with investors, Invesco CFO Loren Starr attributed the equity outflows to underperformance of some of the company's equity mutual funds.

Mr. Starr said some of the underperforming funds are in the process of being merged with better-performing ones, which should lead to a lower redemption rate in the future.

Analysts said the company needs to reverse the negative equity flows.

Barclays Capital's Mr. Freeman said he has concerns because Invesco failed to keep up with the results of other managers with positive equity inflows in the first quarter. He said the company's inflows were in low-fee passive products.

Allegations of overcharging for foreign exchange trades have swirled around two major asset managers reporting in the first quarter, State Street Corp. and Bank of New York Mellon.

The companies are being sued by various states and pension systems that allege they were defrauded by being charged higher than promised rates. Officials of both banks have denied wrongdoing.

But the charges seem to be having little immediate impact on the institutions' financial picture, and both say that foreign currency trading revenue is a small part of overall revenue.

The first quarter was particularly strong for State Street and BNY Mellon. At State Street, fee revenue overall was $1.79 billion on March 31, a 16% increase from the year-earlier period. BNY Mellon's first-quarter revenue was $2.83 billion, a 12% increase from a year earlier.