Equity market jump helps bottom lines of money managers

Rising equity markets helped large publicly traded money managers such as Invesco Ltd., Affiliated Managers Group Inc. and Franklin Resources Inc. gain higher-fee inflows in the first quarter of 2013, but it's far from clear whether that could signal a groundswell toward stocks and away from lower-fee fixed-income investments.

Atlanta-based Invesco, for example, reported $2.4 billion in net inflows into equity strategies for the three months ended March 31, a sharp change from the previous quarter when it saw $3.3 billion in net outflows from equities. But inflows to bonds remained stronger, at $5.3 billion.

“I would classify it (as the) early stages of the rotation into equities,” Invesco CEO Martin Flanagan said in a call with analysts on April 30. “I would expect people to be cautious (about moving into equities) throughout the summer.”

Invesco reported net income of $232 million in the first quarter, up 15.4% from a year earlier as it generated larger servicing and performance fees. The company reported assets under management of $729.3 billion as of March 31, up 6% from last quarter and 8% from a year earlier.

“There was relatively better demand for equity products but it wasn't great,” Robert Lee, an analyst and managing director with Keefe, Bruyette & Woods Inc. in New York, said of the first quarter. “I wouldn't describe it as a flood; you didn't get the sign that people were selling bond funds to get into equities.”

The 10 largest publicly traded money managers that break down flows by asset class had combined net inflows of $65 billion into equities during the first quarter, and $42.3 billion into fixed income.

Money managers riding the tide with positive equity flows included Boston-based AMG, which owns stakes in 27 money management firms. AMG executives said clients of AMG affiliates added record net inflows of $12 billion into global and emerging markets equities as well as alternatives in the first quarter.

AMG does not break down inflows by asset class, but Chairman and CEO Sean Healey said in a conference call with analysts on April 30 that flows were broadly distributed across equity and alternative products.

AMG's net income of $62.4 million in the first quarter surged 67% from the year-earlier quarter. The company had combined AUM of $462.5 billion for its money management affiliates as of March 31, up 7.1% from the prior quarter and 27.1% higher than the first quarter of 2012.

Michael Kim, a managing director with Sandler O'Neill & Partners LP, New York, said AMG was able to take advantage of international sales offices that accounted for 50% to 75% of their inflows.

Mr. Kim said international distribution, scale and diversification of products are increasingly factors that separate winning and losing firms. He said the best-performing money managers in the quarter — Invesco, Franklin and AMG — “checked all the boxes” in those areas.

San Mateo, Calif.-based Franklin Resources reported net new inflows of $700 million into global and international equities in the first quarter vs. net outflows of $4.4 billion in those strategies in the fourth quarter of 2012.

But the equity inflows paled in comparison to fixed-income inflows. Global and international bond funds and strategies had $15.3 billion in net new inflows in the first quarter.

Franklin CEO Greg Johnson said demographics play a role in fixed-income flows. The average investor is getting older and “has less of an appetite for equities,” Mr. Johnson said in a quarterly earnings call.

Franklin reported net income of $572.8 million in the first quarter, up 11% from the prior quarter and up 14% from the year-ago quarter.

Operating income of $729.4 million was up 6% from the previous quarter and up 18% over the first quarter of 2012. Franklin Resources reported AUM of $823.7 billion as of March 31, up 5% from the previous quarter and 14% from a year earlier.

For the world's largest money manager, BlackRock Inc., New York, equity dominated other asset classes in the quarter, with $33.7 billion in net inflows. Fixed income, on the other hand, saw net outflows of $2.6 billion.

BlackRock's growth in equities, however, was in lower-fee exchange-traded funds and passive strategies. Active equity strategies had net outflows of $6.8 billion in the first quarter.

Overall, the company reported AUM of $3.936 trillion as of March 31, up 4% from the prior quarter and 7% higher than the year before. Net income of $632 million in the first quarter was down 8% from the prior quarter but up 10% from the year-over-year quarter.

But not all money managers in the first quarter had positive inflows.

Legg Mason Inc., Baltimore, continued its six-year losing streak with net outflows of $1.8 billion. Investors added $1.2 billion to Legg Mason money market funds, but that was offset by withdrawals of $2.6 billion from stock strategies and $400 million from bonds.

Still, Joseph A. Sullivan — in his first quarterly report as the company's president and CEO — saw a silver lining. In a conference call with analysts on April 30, Mr. Sullivan said those were the lowest outflows since 2007.

“Now to be sure, less negative is still negative,” Mr. Sullivan said. “However, the improvement in net flows is meaningful and encouraging.”

Legg Mason's net income of $29.2 million in the first quarter was a 62% decline from the prior year. Legg Mason overall reported AUM of $664.6 billion as of March 31, up 2.4% from the previous quarter and a 3.3% rise from a year earlier.

Sandler O'Neill's Mr. Kim said some Legg Mason affiliates were having better performance, but others continued to be challenged.

Legg Mason announced in January it was closing its Legg Mason Capital Management unit and moving the remaining $7 billion to its ClearBridge Investments affiliate. Legg Mason Capital Management, headed by legendary portfolio manager Bill Miller, had $70 billion under management in 2007.

Another struggling firm, Janus Capital Group Inc., Denver, reported its 15th straight quarter of negative fund flows, this time with outflows of $3.9 billion, up slightly from a quarter earlier.

Janus' net income was $28 million in the quarter, down 10.2% from the previous quarter but 23.8% higher than the year-earlier figure. The company reported $163.8 billion in total AUM as of March 31, up 4.4% from the previous quarter due to investment performance, but was down 0.1% from a year earlier.

INTECH, its institutional quantitative equity unit, saw net outflows of $2.4 billion in the first quarter vs. $1.6 billion in the previous quarter and $1.8 billion in the first quarter of 2012.

Despite the outflows, INTECH finished the first quarter with $41.7 billion in assets under management, a 3.7% gain from the prior quarter, due to improved overall investment performance.

Janus CEO Richard Weil told analysts in an April 23 conference call that performance gains at INTECH are attracting the attention of investment consultants, but it will take some time before it is realized in new inflows.

One money manager seeing mixed results in the first quarter was T. Rowe Price Group Inc., Baltimore. While the company reported net inflows of $3.3 billion in the first quarter, that figure was lower than analysts' expectations.

Mutual fund inflows of $7.6 billion, including $5.6 billion into equity funds, were partially offset by net outflows of $4.3 billion, primarily from international institutional investors.

Overall, T. Rowe Price Group reported a record $617.4 billion in AUM as of March 31, up 7% from the previous quarter and 11.2% higher than a year ago. Net income was $241.9 million, a 4.2% increase from the previous quarter and 22.5% higher than the first quarter 2012. n