For money managers, assets rise, but inflows, profits prove more elusive

A stock market surge in the first quarter of 2012 helped boost assets under management at most publicly traded money managers. But inflows and profits didn't always follow, and top money management executives concede that uncertainty about where the economy is headed is still an issue.

T. Rowe Price Group Inc., Baltimore, had one of the strongest showings among public companies in the three months ended March 31. The company finished the quarter with a record $554.8 billion in assets under management, the result of market gains of $52.9 billion and record net inflows of $12.4 billion. That's up sharply from the previous quarter's market gains of $30.7 billion and net inflows of $1.1 billion.

But CEO James Kennedy said he doesn't expect large positive market returns to continue to build AUM.

“We recognize that the market returns we saw in the first quarter would generally not be repeatable during the balance of the year,” Mr. Kennedy said in a statement issued in connection with the company's earning report.

“Markets remain anxious about continued economic weakness and financial uncertainty in Europe, U.S. budget issues, higher energy prices, political turbulence in the Middle East, and slowing growth in China.”

Another top executive — Laurence D. Fink, chairman and CEO of the world's largest money manager, BlackRock Inc. — said during an April 18 analysts conference call that the markets were “quite fragile.”

“There is a great deal of uncertainty ahead of us,” he said.

BlackRock also benefited from market and currency gains, as its assets under management increased to $3.7 trillion in the quarter, up from $3.5 trillion in the prior quarter.

But the picture wasn't entirely rosy. The company experienced net outflows in the quarter of $10.3 billion for long-term strategies and $14.9 billion for cash management strategies.

BlackRock's institutional long-term AUM grew 5% to $2.285 trillion in the first quarter and reflected long-term net inflows of $6.2 billion, an earnings release said. Those numbers were driven by $9 billion of inflows into lower-fee passive strategies, which were partially offset by outflows of $2.8 billion from active strategies.

Mr. Fink said during the call that while BlackRock has seen some nice long-term flows, investors still are reluctant to make investment decisions.

“It's not a reluctance because they don't want to do something; it's a reluctance overlaying fear: "Will this cost my job? How do I respond?'” Mr. Fink said. BlackRock is trying to demonstrate to investors that doing nothing is an even greater risk, he said.

Mr. Fink said the dialogue BlackRock is having with investors has also changed from several years ago. Instead of talking about core fixed-income or large-cap equity strategies, investors are talking about multiasset solutions or alternatives, he said.

BlackRock reported a $572 million profit in the quarter, up 3.1% from the prior quarter and 0.7% from the same period a year ago.Robert Lee, an analyst with Keefe, Bruyette & Woods Inc., New York, said in an interview that he thought BlackRock had a fine quarter. He added, however, that investors are concerned about the stability of the economy and how it will affect asset management companies in the future.

BlackRock's stock fell 2.87% to $196.01 on April 18 following the earnings release. It fell further, closing at $186.94 on April 23, before recovering slightly to close at $192.50 on April 27.

“Investors don't have confidence that the recovery will sustain itself given what has happened in prior years,” said Mr. Lee. “It's not just enough to have a good quarter; its important, but not enough,” he said. “I think investors want to say, "What it is it about this quarter that I can comfortably extrapolate into other quarters.'”

He said it apparently was easier for investors to conclude that T. Rowe's positive track record will continue. T Rowe Price stock closed at $61.95 on April 24 after its earning release, a 1.5% gain. It closed at $63.23 April 27.

Mac Sykes, an analyst at Gabelli & Co., Rye, N.Y., said the first quarter was a tough one for traditional equity managers, as longer-term trends of assets flowing out of equities and into fixed-income strategies continued.

Mr. Sykes said T Rowe Price blossomed in the first quarter. He said the company gained not just because of market appreciation, but because of strong performance for its mutual funds and target-date offerings to defined contribution plans.

Target-date funds accounted for more than one-third of the company's first-quarter net inflows.

Another asset manager with strong performance in the first quarter was Invesco Ltd., Atlanta. Invesco reported $672.8 billion in assets under management as of March 31, up 7.6% from the prior quarter and up 4.8% from the first quarter of 2011.

Net inflows of $8.1 billion for the quarter were up from $6 billion in the prior quarter but down from $9.2 billion for the year-earlier period.

During a conference call, Invesco CEO Martin Flanagan discussed rumors that Invesco might sell its Atlantic Trust Private Wealth Management unit, which is responsible for $18 billion of the company's AUM.

“We don't ever speculate on any of these activities,” he said. But he added: “We're going to continue to stay on the path that we've been on with them, and they've done a great job. We can't say anything more than that.”

Industrywide, AUM was up 6% on average because of higher markets for money managers reporting through April 27 — the Standard & Poor's 500 index was up 11.6% in the first quarter — but the average organic growth was -3%, according to a Goldman Sachs Group research report.

“Perhaps the most notable trend thus far is the strength in asset allocation product,” the report said. “Of the firms with positive flows, between 33% and 50% of inflows came in multiasset class product.”

Institutional and retail investors both are still standing on the sidelines regarding new allocations, said Michael Kim, an analyst with Sandler O'Neill & Partners LP, New York.

“People have been talking about this "rerisking' dynamic for some time, but it really hasn't happened,” said Mr. Kim.

Asset management companies that were able to report strong inflows because of market gains in the first quarter, but net outflows overall, included Janus Capital Group Inc., Denver.

Market appreciation of $18.3 billion increased assets to $164 billion in the first three months of 2012, even while the company was reporting net outflows of $2.5 billion.

Net income also was down, more than 36% from the previous quarter and almost 40% from the first three months of 2011.

Analysts said Janus is dealing with several issues. While equity performance improved in the first quarter, new performance-based fees — which became fully effective during this past quarter and cover 37% of Janus' mutual funds — are based on a rolling three-year schedule.

“And the long long-term performance for those funds (is) just horrendous right now,” said Greggory Warren, an equity analyst with Morningstar Inc., Chicago.

The performance fees, which can slide up and down as much as 15 basis points, led to a $19 million reduction in fee income at Janus in the first quarter, according to the company's financial statement, compared with a $9.2 million reduction in the previous quarter.

Keefe, Bruyette & Woods' Mr. Lee said Janus' emphasis on equity strategies also hurt it, as the asset class is generally out of favor. “Even if you've had relatively better performance, there's just not a lot of new demand for those strategies right now,” he said.

In contrast, State Street Global Advisors, Boston, which runs primarily passive institutional strategies and exchange-traded funds, reported $10 billion in net inflows in the first quarter.

Joseph L. Hooley, chairman, president and CEO of SSgA's parent, State Street Corp., said the most recent quarter's scheduled $31 billion redemption in assets managed for the Treasury Department significantly reduced net inflows.

“If you exclude that Treasury redemption, which was planned, SSgA had $41 billion in net new flows in the first quarter ... as strong a quarter as we've had in a while,” he said.

Mr. Hooley said the company will continue to focus on its ETF business, which accounted for $8 billion of the new flows in the first quarter.

Another money manager, Federated Investors Inc. Pittsburgh, reported $42.3 million in net income in the latest quarter, a 15% increase from the prior quarter and up 27% from the year earlier. Federated, the third-largest U.S. manager of money market funds, was helped by an easing of fee waivers on money market products as yields rose. The waivers were put in place to prevent investors from fleeing because of low interest rates.

The waivers cut the pretax profit of the company by $22.3 million in the current quarter, but Federated had predicted several months ago a more severe $27 million hit.

Next quarter fee reduction will reduce profits by $20 million, Chief Financial Officer Thomas Donahue said in a conference call with analysts on April 27.