Money managers see assets bounce back, but investors still leery of risk

A double-digit rebound for U.S. equity markets in the fourth quarter buoyed money managers' assets under management, but those good tidings were tempered by continued moves by risk-averse institutional clients out of higher-margin investment strategies.

Speaking on earnings conference calls in recent weeks, executives at a number of major money management firms — including BlackRock Inc. and Invesco Ltd. — cited hopeful signs that investors are poised to ramp up risk this year.

For the most part, however, the latest results showed investors moving in the opposite direction — haunted, perhaps, by their experience in the third quarter, when U.S. equities plunged 15% and broad measures of international developed and emerging markets equities tumbled 17%.

The market's fourth-quarter rebound — with the broad Russell 3000 benchmark for U.S. equities jumping 12.1% and the MSCI World benchmark rising 7.73% — provided a number of firms with a roughly 5% boost to AUM for the period.

But with few exceptions, money managers reported net outflows from active equities during the quarter — an especially painful development for firms specializing in that market segment.

Janus Capital Group Inc., for example, reported net outflows of $4 billion, as $5.4 billion of outflows from the firm's equity affiliates outpaced $1.4 billion of inflows for its fixed-income offerings. T. Rowe Price Group Inc. likewise disappointed analysts with its report of $1.1 billion in net inflows, powered by its mutual fund business, leaving some questioning whether the well-respected firm can continue to command industry-topping valuations.

T. Rowe's mutual funds pulled in $2.2 billion for the quarter, but its institutional business saw $1.1 billion in outflows, with the company citing in its news release continued derisking by institutional investors resulting in heavy outflows from active equity strategies.

In separate reports on T. Rowe's latest results, Christopher Shutler, an analyst with Chicago-based William Blair & Co. LLC, and Craig Siegenthaler, a New York-based analyst with Credit Suisse, said T. Rowe's inflows fell short of their respective predictions for the quarter of $3.6 billion and $2.7 billion, respectively.

Most analysts said they remain convinced Baltimore-based T. Rowe deserves a relatively high earnings multiple, but as Glenn Schorr, a New York-based analyst with Nomura Securities International Inc., wrote in a Jan. 27 earnings note: “The stock's big premium multiple to the group leaves little wiggle room for disappointment.”

Janus reported AUM of $148.2 billion as of Dec. 31, up 5.1% from the prior quarter; T. Rowe reported AUM of $489.5 billion, up 7.9%.

The continuation of a broad move out of active equities in the fourth quarter was offset by allocations to passive strategies, including exchange-traded funds, and several firms that offer those products were able to overcome the exodus from higher-margin strategies.

For example, BlackRock, the industry leader with $3.513 trillion in assets under management as of Dec. 31, more than offset $22.2 billion in outflows from its active equity and fixed-income strategies with inflows of $25 billion for its passive strategies in those asset classes and $19.8 billion in their respective ETFs.

Invesco, with total assets of $625.3 billion as of Dec. 31, said its ETFs and passive strategies accounted for all but a fraction of its net inflows of $6 billion for the latest quarter.

Affiliated Managers Group Inc., the Boston-based holding company with 27 money management affiliates, was the most prominent exception to the fourth-quarter rule of net outflows from actively managed strategies. The firm, which had $327.5 billion in total assets as of Dec. 31, reported quarterly inflows of $4.1 billion for active global equity, emerging markets equity and alternative strategies managed by its affiliates, lifting its full-year inflows to $23 billion.

In a telephone interview, Sean M. Healey, AMG's chairman and CEO, noted that non-U.S. investors have begun returning to riskier strategies earlier than their U.S. counterparts. AMG's build-out over the past five years of distribution arms in Sydney, London, Hong Kong and Dubai helped the firm to capitalize on that demand, he noted.

Mr. Healey said non-U.S. investors accounted for all of AMG's net inflows for the latest quarter, lifting their weight as a proportion of its total client base to 53% from just 5% at the time AMG became a public company in 1997.

He joined other industry leaders, such as BlackRock Chairman and CEO Laurence D. Fink, in predicting that U.S. investors — retail and institutional alike — will gradually move back to riskier strategies as well, compelled by current shortfalls in retirement savings or pension funding levels. “For all of those investors, they're not going to meet their return objectives by buying long bonds at practically no return,” Mr. Healey said.

Research analysts covering publicly held money managers say whether that happens will help determine how much upside money manager stocks will be able to command this year.

The flight from active equity products has certainly been an overhang for the group, and a turnaround would be positive, noted Jason Weyeneth, a New York-based analyst with investment bank Sterne Agee & Leach Inc.

Mr. Weyeneth said signs that market volatility is calming early this year have left him cautiously optimistic, but that would have to be sustained over time — with improvements in employment and the broader economy — to have an appreciable impact on net flows.

Credit Suisse's Mr. Siegenthaler said following heavy outflows in 2011 for active equities and other higher-margin strategies, it shouldn't be difficult for flow numbers in 2012 to show improvement, as many money management executives are predicting. The strength of that upturn is the issue, he said.