Markets give managers nice boost in quarter

Publicly traded money managers saw modest gains in assets under management for the quarter ended Sept. 30, helped generally by rising equity markets.

BNY Mellon Asset Management, BlackRock Inc., T. Rowe Price Group Inc. and Northern Trust Corp. reported the biggest asset gains from the previous quarter, but all traditional asset managers tracked by Pensions & Investments that had reported by Oct. 25 showed AUM increases in the Sept. 30 quarter.

BNY Mellon, New York, reported $1.5 trillion in assets under management as of Sept. 30, up 7% from the second quarter and up 13% from a year ago. New York-based BlackRock's AUM of $4.1 trillion was up 6% from the previous quarter and 11.5% from a year ago. Northern Trust, Chicago, had $846 billion in assets, up 5.4% from three months earlier and 12.9% for the year-earlier quarter. T. Rowe Price Group's $647 billion in assets was a gain of 5.1% from the previous quarter and 10.9% from a year earlier.

In the quarter, the Standard & Poor's 500 stock index gained 5.25%, the Russell 1000 gained 6.02%, and the MSCI All-Country World index, ex-U.S., gained 10.23%. In comparison the Barclays Capital U.S. Aggregate Bond index posted 0.57%.

But the asset gains did not necessarily coincide with net inflows. Baltimore-based T. Rowe Price reported net outflows of $7.4 billion; the firm had $8 billion in net outflows for the quarter ended June 30.

T. Rowe Price was particularly hard hit by outflows from non-U.S. institutional investors, including sovereign wealth funds. These investors withdrew $9 billion in the third quarter after pulling out $8 billion in the previous quarter, said Brennan Hawken, equity analyst with UBS Investment Bank, New York.

“It's a total disaster,” he said, adding non-U.S. investors are responsible for 7% of the firm's AUM.

Still, the asset growth was enough to increase profits for T. Rowe Price and most other managers that experienced outflows. In the third quarter, T. Rowe Price reported $270.3 million in profits, up 9% from a year earlier.

The one exception to the increased profit picture in the third quarter was Federated Investors, Pittsburgh. The company reported net income of $37.7 million, down 32% from the second quarter and down 7% from a year earlier.

Federated Investors reported assets under management of $366.7 billion at Sept. 30, up 0.8% from three months earlier and up 0.7% from the same period a year earlier. Federated said it had $521 million in net equity outflows and $321 million in net fixed-income outflows in the quarter.

Janus Capital Group, Denver, also saw net outflows of $4.2 billion in the third quarter, the 17th straight quarter of net outflows. But again, assets overall increased because of market gains. The company reported assets of $166.7 billion, up 2.2% from the prior quarter and 7.8% from a year earlier.

Franklin Resources Inc., San Mateo, Calif., experienced net outflows of $2.9 billion in the third quarter, but market gains increased assets to $844.7 billion, up 3.6% from the previous quarter and a 12.6% gain from a year earlier.

Legg Mason Inc., Baltimore, also was in this category, reporting $1.4 billion in net outflows; the firm's equity strategies saw $4 billion in outflows.

Company CEO Joseph Sullivan said in a conference call with analysts on Oct. 25 that the equity outflows included a large global equity redemption from an institutional client at its Batterymarch Financial Management Inc. unit and $700 million in outflows from the closing of the company's Esemplia Emerging Markets unit.

Legg Mason still managed to see a small increase in AUM because of market performance in the Sept. 30 quarter, up 1.8% from the previous quarter and 0.8% from a year earlier.

Meanwhile, analysts are focused on what the future holds for Invesco Ltd., which does not report its results until Oct. 31. Preliminary results look positive for the Atlanta-based company. Mr. Hawken said Invesco is expected to have a strong third quarter, with net inflows of $18.2 billion helping bring total assets to $745.5 billion, a 5.7% increase from the third quarter of 2012.

But a big concern is the Oct. 15 announcement that star portfolio manager Neil Woodford, head of Invesco's U.K. equity business, is leaving. “He is like the Warren Buffett of the U.K.,” Mr. Hawken said. The pending departure has put “an overhang” over Invesco's share price, he added.

Christopher Shutler, an equity research analyst at William Blair & Co., Chicago, said in an Oct. 17 report that the announcement won't have an immediate impact because Mr. Woodford is staying until April, when he will start his own firm. But later on, all bets will be off.

Mr. Woodford manages about $50 billion or 7% of Invesco's total assets under management, said Mr. Shutler. He estimated Invesco will see $7 billion in institutional outflows and $7.5 billion in retail redemptions because of Mr. Woodford's departure.

“In addition, we project some sales headwind from Mr. Woodford's pending departure,” said Mr. Shutler in his report. “Between now and then, we expect modest outflows, primarily from retail investors. We then expect outflows to pick up in the mid- to latter part of 2014, particularly once Mr. Woodford's new firm is up and running.”

Based on those assumptions, Mr. Shutler forecasts an annualized net revenue impact (net of distribution expenses) of around $140 million, or about 4% of total company net revenue in 2014.

For BlackRock, the world's largest money manager, the third quarter was a good one. Asset gains of 6% from the previous quarter helped the company cross the $4 trillion mark.

BlackRock's gain was helped by its iShares exchange-traded funds business, which had $20.3 billion in net inflows.

BlackRock's institutional business saw net outflows of $3.3 billion for the quarter, but net inflows in BlackRock's retail products increased 7.5% in the nine months ended Sept. 30. That pace is more than double the 3% increase for calendar-year 2012, said David Chiaverini, an equity analyst at BMO Capital Markets, New York.

He said this is good news for BlackRock because retail assets, despite being only 11.5% of BlackRock's $4.1 trillion in assets, account for 34% of base fees collected from clients. “It goes to show how profitable the retail segment is to asset managers,” he said.

Mr. Chiaverini said institutional assets make up $2.5 trillion of BlackRock's AUM, but account for 31% of base fees because many institutional strategies are passive and some investors get volume discounts. IShares, with $857 billion in assets, accounts for 35% of base fees, he said.

Mr. Chiaverini said BlackRock's massive scale gives the manager advantages over other firms, citing its advertising on nationally televised sporting events and prime-time programs, which is designed to boost its retail business.

Robert Lee, equity research analyst at Keefe, Bruyette & Woods in New York, said BlackRock's sheer size and breadth give it the ability to counterbalance strategies that are losing assets. As an example, he cited overall net inflows in the third quarter based on the strength of its ETF business, which offset outflows in the institutional business and active equities.

“The company's multiline investment capabilities give it a long-term advantage,” he said.

One firm yet to report but with expected strong results is Affiliated Managers Group Inc.

Mr. Shutler of William Blair said he expects that when the holding company reports its third-quarter results on Nov. 5 it will show $10 billion in net inflows.

Mr. Shutler said AMG's expected growth is driven by a combination of strong performance of many of its largest affiliates, increased reach through the firm's global distribution network, and being in the right asset classes at the right time.