Publicly traded money managers benefit from strong equity markets

Strong fourth-quarter equity returns boosted assets under management of the largest publicly traded money managers.

T. Rowe Price Group Inc., Baltimore, reported the highest AUM percentage gains for the quarter at 7%. It ended 2013 with a record $692.4 billion, up 20% from a year earlier, the highest jump among managers that have reported fourth-quarter earnings.

T. Rowe had $100 million in net inflows for the quarter, up from $7.4 billion in net outflows the previous quarter.

The highest year-over-year AUM increase came despite the firm's having $12 billion in net outflows for the year. T. Rowe has seen outflows from institutional investors in nine of the last 10 quarters, but excluding some large sovereign wealth funds rebalancing or changing asset allocation strategies, the institutional business is in “inflow mode,” said Christopher Shutler, an equity research analyst at William Blair & Co., Chicago.

T. Rowe gained about $4 billion in new target-date fund assets, offsetting the $3.7 billion in institutional outflows.

“I'm encouraged the institutional outflows are diminishing,” Mr. Shutler said. “It's gotten smaller the last couple quarters ... and performance remains excellent.”

The Standard & Poor's 500 index was up 10.49% for the quarter ended Dec. 31, slightly above the Russell 1000's 10.22%. The MSCI All Country World index ex-U.S. returned 4.85%. Fixed income, on the other hand, was nearly flat with a -0.14% return for the quarter. The yield on the U.S. Treasury 10-year note increased 42 basis points to 3.03%.

“Despite all the hoopla around better equity flows, and while it seemed a little better in the fourth quarter, there was nothing to write home about” in terms of inflows, said Robert Lee, equity research analyst at Keefe, Bruyette & Woods in New York. “I didn't really see it manifest itself in new business in the fourth quarter. It's been hit or miss for managers.”

Market appreciation and income were the main sources of growth for most managers, but J.P. Morgan Asset Management, BlackRock Inc. and BNY Mellon Investment Management, all in New York, reported strong net inflows for both the quarter and the year.

BlackRock, the world's largest money manager, had the highest net inflows — $40.5 billion in the fourth quarter and $117 billion for the year. Nearly half of the quarter's inflows, $19.1 billion, went to its iShares exchange-traded funds business, increasing total AUM to $914.4 billion. The firm's LifePath target-date series surpassed $100 billion during the quarter. As a firm, BlackRock's reported $4.324 trillion in AUM, up 5.6% from a quarter earlier and 14.1% from a year before.

Keefe Bruyette's Mr. Lee said BlackRock has benefited from strong flows into ETFs, and that should continue. He added BlackRock is able to produce good, consistent organic growth from its diverse mix of strategies.

BlackRock also reported $814 million in net income, a 15% increase from the prior quarter and up 22% from the year-earlier quarter.

JPMAM reported the second highest net inflow level for the quarter with $23 billion, including $16 billion to long-term strategies, led by $10 billion in new flows to alternatives and multiasset strategies. For the year ended Dec. 31, JPMAM had $86 billion in net inflows, with $90 billion to long-term strategies and net outflows of $4 billion to liquidity strategies. Also for the year, alternatives and multiasset strategies had net inflows of $48 billion; equity, $34 billion; and fixed income, $8 billion. It finished the year with $1.6 trillion, up 3.8% from Sept. 30 and 12.1% higher than as of Dec. 31, 2012.

BNY Mellon reported net inflows of $8 billion for the quarter and $95 billion for the year, contributing to AUM rising to $1.58 trillion, up 3% for the quarter and 14% higher from the year before.

Analyst Michael Kim, managing director of Sandler, O'Neill & Partners LP, New York, said based on industry data, retail investors' appetite for risk is building, driving shifts into equities from fixed income. That bodes well for flows, fees and general growth, he said.

On the institutional side, equity rallies have pushed pension plans closer to becoming fully funded, causing plans to become more defensive in their asset allocations and moving more to liability-driven investing strategies, he added.

Invesco Ltd., Atlanta, and Franklin Resources Inc., San Mateo, Calif., are “very well positioned in this rerisking environment, especially Invesco,” Mr. Kim said. He added Franklin does not get the credit it deserves for the strength of its equity strategies.

Invesco reported $778.7 billion in AUM, up 4.5% from the end of the previous quarter and up 16.7% from a year earlier. It had $5.2 billion in net inflows, led by $2.6 billion into its PowerShares ETF business, up from inflows of $800 million in the third quarter and $2.5 billion in net outflows in the year-earlier quarter. Long-term passive and active strategies had $1 billion in net inflows combined in the most-recent quarter.

The inflows came despite its U.K. equity income business experiencing $4.8 billion in net outflows from Oct. 15 to Dec. 31. It was on Oct. 15 that the firm announced star portfolio manager Neil Woodford, head of U.K. equity, would leave the firm in April.

“The risk for Invesco is if he runs nearly identical strategies at his new firm as he did at Invesco,” Mr. Shutler said. Mr. Woodford is setting up a new asset management business at Oakley Capital Management. It is not known at this point what kind of strategies he will manage.

Invesco's inflows were almost double what Mr. Shutler expected.

Franklin Resources' flows were net zero for the quarter, but AUM still increased 4% from the end of the previous quarter to $879.1 billion. The company did report the second-highest net income among managers at $603.8 million, up 19% from the third quarter and up 17% from the year-earlier quarter. Net inflows for the year were $24 billion.

Rerisking is coming too early for Janus Capital Group, Denver, because of its continued underperformance, Mr. Kim said.

“It's going to take time for (Janus' new CIO Enrique Chang) to put his stamp on processes and people,” Mr. Kim said. “It will take time to filter through to the investment track-record performance.”

Janus reported net outflows of $6.2 billion for the fourth quarter, the 18th consecutive quarter the company has suffered net redemptions. The outflows compare to $4.2 billion in the previous quarter and $3.6 billion in the fourth quarter of 2012. Despite continued outflows, Janus' AUM increased 4.3% in the quarter to $173.9 billion, and is up 10.9% from a year ago.

Morgan Stanley Investment Management, New York, also saw equity outflows with $1.1 billion in net outflows, but that was more than offset by $2.2 billion of net flows into fixed income, $1.8 billion into liquidity strategies, $1.1 billion into alternatives and $400 million into real estate. MSIM reported $373 billion in AUM, up 4% from Sept. 30 and a 10% increase from a year earlier.

Legg Mason Inc., Baltimore, saw an improvement in inflows in the fourth quarter, with $9.9 billion in net inflows to liquidity strategies. Equity and fixed-income flows canceled each other out, but were both up significantly from $4 billion in equity outflows and $300 million in fixed-income inflows in the third quarter. Legg Mason reported $679.5 billion in AUM, up 3.6% from the end of the previous quarter and up 4.7% from a year earlier.

KBW's Mr. Lee said in general, Legg Mason is making progress with a “better flow picture and higher margins.”

Affiliated Managers Group Inc., which will not report its earnings until Feb. 4, is forecast to have another strong quarter, analysts said.

Mr. Shutler expects AMG to report about $7.9 billion in net inflows. AMG has had net inflows between $5 billion and $13 billion for five straight quarters, including four with at least $10 billion, he added.

“Compared to most active managers, their flows have been fantastic,” Mr. Shutler said.

AMG has benefited from being in the “right asset classes at the right time,” Mr. Shutler said. Alternatives and global equity represent 36% and 28%, respectively, of its revenue.