Inflows keep managers afloat in quarter filled with uncertainty

The largest publicly traded money managers depended on inflows for growth in the fourth quarter, as market returns grew tepid amid uncertainty over the presidential election and negotiations to avert the fiscal cliff.

“There wasn't a lot of market lift, but there was some,” Robert Lee, New York-based analyst at Keefe, Bruyette & Woods Inc., said in an interview. Among indexes:

cThe Standard & Poor's 500 stock index returned -0.38% for the three months ended Dec. 31, while the Russell 3000 index was up a meager 0.24%;

cThe Morgan Stanley Capital International Europe Australasia Far East Index gained 6.6%; and

cThe Barclays Capital Aggregate Bond index rose a scant 0.21%.

Still, publicly traded money managers who as of Feb. 1 had reported their fourth-quarter earnings and assets under management didn't see a major decline in assets — in fact, they generally saw slight gains.

Mr. Lee added, “There was modest asset growth and some organic growth.

“For all the angst in the quarter, it was mildly positive. You didn't see those big, huge swings. October and November weren't so great, but December was better. Considering all the headlines, things kind of held in there relatively well.”

Exchange-traded funds were the main contributors to two of the three firms with the largest net inflows.

BlackRock Inc., the world's largest money manager,led the way, with overall net inflows of more than $47 billion. That total reflected inflows of $31.2 billion to equity, $12.4 billion to fixed income and $4.1 billion to multiasset strategies, the firm said in its earnings statement. Alternatives strategies had net outflows of $700 million.

Daniel Fannon, equity analyst at Jefferies & Co., New York, said in a client note that BlackRock ETFs took in $40 billion in the quarter, mostly in equities, while institutional fixed-income index products brought in another $8 billion.

Assets in BlackRock's iShares ETF business totaled $752.7 billion in the latest quarter, up 6.6% from the third quarter and 26% above a year earlier.

BlackRock's total assets in the quarter reached a record $3.792 trillion, up 3% from the prior quarter and 8% higher than the end of 2011.

State Street Global Advisors, which was third in total net inflows with $24 billion, had $13 billion of inflows to the firm's ETFs, Joseph “Jay” Hooley, chairman, president and CEO of parent State Street Corp., said in an earnings conference call Jan. 18.

SSgA had $2.089 trillion in AUM as of Dec. 31, up 1.2% from three months earlier and 13.2% higher than the end of the previous year.

J.P. Morgan Chase & Co. reported asset management net inflows of $32 billion, including $24 billion in liquidity strategies, ranking it second in the quarter. Those inflows helped bring its total AUM to $1.426 trillion as of Dec. 31, up 1.3% from the prior quarter and a 7% increase from a year earlier.

The flows came from a variety of strategies, according to a statement. Among U.S. institutional clients, inflows were partially driven by interest in alternatives, including real assets, as well as multiasset and asset-allocation strategies.

Bank of New York Mellon Corp.'s asset and wealth management business reported net inflows of $14 billion in the quarter, helping it reach record total AUM of $1.386 trillion, up 2% from the prior quarter and 10% higher than a year earlier.

“One company stands out from those that have already reported this quarter; BlackRock is the outlier on a positive note in terms of net inflows, and a lot of that is owed to its ETF inflows,” said Matthew Kelley, senior analyst at Morgan Stanley, in an interview.

He sees that trend of ETF net inflows continuing in 2013. “On a week-to-week basis, looking at the fund flow data so far this year points to equity mutual fund and ETF inflows. There's no general consensus from the market as to why this is occurring; it still seems too early to tell if the switch to equity inflows is seasonal or a reversal for people who had sold prior to the perceived fiscal cliff.”

Mr. Fannon at Jefferies said in a Jan. 30 note to clients that equity inflows are off to a fast start this year, with more than $6.8 billion in active domestic inflows. “The sustainability of these trends as well as any eventual reversal in fixed-income inflows remains up for debate. ... Any hint of asset rotation would be a bullish indicator, in our view.”

“A lot of investors are looking past the fourth quarter,” said KBW's Mr. Lee. “Investors are now re-engaging in the new year, and if that continues, that'll be good for flows. As long as nothing is problematic in the asset management business, (investors) will stick with them as long as they see more investor engagement in the market.”

Among the larger publicly traded money managers, net outflows were reported for the fourth quarter by Legg Mason Inc., at $7.5 billion; Goldman Sachs' asset and wealth management business, $7 billion; T. Rowe Price Group Inc., $4.2 billion; and Janus Capital Group Inc., $4 billion.

Legg Mason on Feb. 1 reported outflows of $8.3 billion from equity and $6.8 billion from fixed income, partially offset by liquidity inflows of $7.6 billion. In the previous quarter, Legg Mason reported $200 million in net inflows — which had reversed six years of net outflows at the firm. The company's AUM totaled $648.9 billion as of Dec. 31, a 0.2% decline from the previous quarter but up 3% from the end of 2011.

In an earnings call on Feb. 1, Peter Nachtwey, Legg Mason's senior executive vice president and CFO, said long-term flows deteriorated in the last quarter, particularly in fixed income, and driven by three redemptions at affiliate Western Asset Management: $2.4 billion from a large state pension client he did not identify, $1.1 billion from the wind-down of its participation in the U.S. Treasury's Public-Private Investment Program and $1.6 billion in ongoing redemptions related to low-fee global sovereign mandates.

According to Goldman's Jan. 16 earnings statement, $5 billion of fixed-income and equity asset outflows were related to the November liquidation of the firm's South Korean money management unit Goldman's fourth-quarter AUM, at $854 billion, was down 0.2% from the prior quarter but up 3% from the year prior.

Janus, meanwhile, reported that net outflows excluding money market funds were $3.6 billion for the fourth quarter, of which $1.6 billion came from its quantitative equity manager subsidiary, INTECH Investment Management. INTECH managed $40.2 billion, or 25.6%, of Janus' total AUM of $156.8 billion as of Dec. 31. Overall assets fell 0.9% from the previous quarter but rose 5.8% increase from the year-earlier quarter. Jefferies' Mr. Fannon said that the INTECH outflows followed a third quarter in which the strategies saw net inflows of $300,000 Other analysts indicated that Janus' flows could benefit from increased equity flows in early 2013.

At T. Rowe Price, Morgan Stanley's Mr. Kelley said, the company “had outflows from both its retail mutual funds and institutional portfolios in the fourth quarter, which for retail was a change from the prior quarter. However, they still have a significant portion of their funds performing above benchmarks. In fact, 78% outperformed their Lipper averages on a three-year basis and that's at the higher range of firms that we analyze.” He expects that T. Rowe Price will also benefit from increase equity flows early this year.

T. Rowe's total assets in the last quarter were $576.8 billion, up 0.4% from the previous quarter and 17.8% higher than the year-earlier quarter. n