Publicly traded managers' growth propelled by a rising stock market

Most publicly traded money managers reported higher earnings in the second quarter, as rising equity markets increased overall assets.

Still, net inflows into active U.S. equity strategies were tepid.

“If you look at broad industry data, one of the things that jumps out is that despite the fact that equities are setting records, flows to equity strategies have been kind of crummy,“ said analyst Robert Lee, a managing director at Keefe, Bruyette & Woods Inc. in New York, who follows publicly traded money managers.

Mr. Lee and other analysts said the concern among investors is whether the day is coming soon when the market changes course from its upward momentum. But weak flows, particularly into active domestic equity strategies, are part of a longer-term trend toward investments in alternatives, as well as into lower-fee passive strategies and exchange-traded funds, they said.

“This is a trend that has been going on for several years,” said Christopher Shutler, an analyst with William Blair & Co. in Chicago.

The trends could create longer-term problems for managers with large active equity franchises, said Morningstar Inc. analyst Greggory Warren, pointing to San Mateo, Calif.-based Franklin Resources Inc., whose institutional investment arm is Franklin Templeton Investments.

Franklin's net income rose 3% to $578.9 million for the three months ended June 30, and was up 5% from the quarter ended June 30, 2013, company data show. The rising stock market saw Franklin's total equity AUM rise to $388.3 billion, up 4% from the previous quarter and up 24% from June 30, 2013.

But Franklin's global equity mutual funds and strategies experienced net withdrawals of $1.2 billion in the second quarter; domestic equity strategies saw net outflows of $600 million. In the first quarter, its global equity portfolios had net outflows of $1.2 billion; domestic strategies, however, had net inflows of $2.6 billion.

The company has 42% of its assets in equities, its largest asset concentration, and CEO Greg Johnson said in a July 30 earnings call that “clearly, passive has been a force that's removed the flows ... from active managers.”

Mr. Johnson attributed Franklin's outflows in the second quarter to three large institutional clients that decided to go passive. He did not name them, but Pensions & Investments reported on May 23 that the Nevada Public Employees' Retirement System had terminated Franklin Templeton, which had run about $770 million in international equities, because the pension fund was moving to a purely passive exposure to that asset class.

Baltimore-based money manager T. Rowe Price Group Inc. reported higher net earnings due to market gains in the second quarter, but again saw slight outflows due to redemptions.

Net income was $305.8 million, up only 0.5% from the previous quarter but 23.4% above the second quarter of 2013. The company reported $738.4 billion in assets under management as of June 30, up 3.8% from the end of the first quarter and up 20.3% from a year earlier.

But the company experienced net outflows of $200 million in the second quarter, compared with net inflows of $8.8 billion in the first.

William Blair's Mr. Shutler said he expects choppiness in flows to continue at T. Rowe Price and the asset management industry as a whole. At T. Rowe, he said, institutional outflows are more likely than inflows in the next few quarters in aggregate as institutional investors appear less interested in both large-cap U.S. equities and fixed income, he said. That means international equities will have to pick up the slack.

But Mr. Shutler said he remains bullish on T. Rowe Price's long-term prospects. He said the company is working methodically to build its international distribution capabilities. He said only 6.2 % of the firm's assets came from non-U.S. investors in the quarter. He also mentioned the firm's target-date fund business is strong, with net inflows of $16.4 billion over the year ended June 30.

Net earnings and AUM also grew at Baltimore-based Legg Mason Inc., but active equity strategies and mutual funds reported outflows. Legg Mason reported $704.3 billion in assets under management as of June 30, up 0.4% from the end of the previous quarter and up 9% from a year earlier.

One firm bucking the equity outflow trend was Affiliated Managers Group Inc., Beverly, Mass. AMG, the publicly traded holding company that acquires majority stakes in money managers, reported total net inflows of $6.9 billion in the second quarter, its 17th straight quarter of inflows.

That number included $4.6 billion of institutional net inflows driven by global equities and alternative strategies and $1.9 billion in mutual fund net inflows focused on global equity and emerging market equities, William Blair's Mr. Shutler said in a report.

Keefe, Bruyette & Woods' Mr. Lee said AMG has been able to drive inflows with consistently strong performance from its boutique affiliates.

He said the company, which added four affiliates this year, has had a solid track record of buying into money management firms that have been able to maintain their strong performance post-acquisition.

On another topic, Morningstar's Mr. Warren said the “most surprising trend” has been some managers seeing net inflows in fixed income, “despite this huge talk of a big rotation from fixed income.” Franklin Resources, Legg Mason and BlackRock Inc. all experienced net inflows in fixed income during the second quarter.

Mr. Warren said net inflows into fixed income were, in general, not in core fixed income but in alternative strategies including unconstrained bonds and high yield.

BlackRock Inc., the world's largest money manager, produced strong net inflows of $30.4 billion into its iShares ETF division and $9.5 billion into fixed income

BlackRock's AUM grew to $4.59 trillion in the quarter, up 4% from the previous quarter and up 19% from the year-ago quarter. That helped BlackRock achieve a quarterly profit of $808 million in the second quarter, up 11% from the same quarter in 2013.

But on the institutional front, BlackRock saw net outflows from active equity strategies of $4.5 billion and $7.9 billion from equity index strategies, a key sign that institutional investors are particularly concerned about the stock market, analysts said.