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November 10, 2014 12:00 AM

Weak equity returns sting managers

Assets under management drop or remain flat during third quarter

James Comtois
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    Joseph Sullivan said 'geopolitical events' caused quite a bit of volatility in the quarter.

    Several publicly traded money managers experienced either a decline in assets under management or flat growth during the third quarter, due to weak equity markets.

    Plus, investors continued to move to passive from active strategies during the quarter.

    “It was a pretty tumultuous quarter,” said Joseph Sullivan, CEO of Legg Mason Inc., Baltimore. “There was quite a bit of volatility in the quarter attributed to geopolitical events. Throw in Ebola for good measure, and you've got a lot of cross-currents going on that didn't necessarily inspire confidence among investors, so you saw them moving money into cash and into passive.”

    Among the “hot political events” he cited were the crisis in Ukraine, protests in Hong Kong and turmoil in the Middle East.

    Legg Mason reported $707.8 billion in assets as of Sept. 30, up 0.5% from the previous quarter and up 8% from a year earlier. The firm experienced net inflows of $13.4 billion for the quarter, compared with net outflows of $8.2 billion in the quarter ended June 30, and net outflows of $1.4 billion during the third quarter of 2013.

    “September was a fairly tough month. A lot of managers' AUM came down because market returns were weaker,” which threw off the entire quarter, said analyst Robert Lee, a managing director at Keefe, Bruyette & Woods Inc. in New York, who follows publicly traded money managers.

    Despite this, Mr. Lee pointed out “most managers are still pretty healthy,” so he doesn't believe the decline in asset growth is a major concern. He also noted that margins are still very strong.

    “There was a lackluster demand for traditional domestic equity strategies and a little bit better demand for non-traditional strategies. Global strategies were one place where there had been continued demand,” he said.

    Domestic equity outflows

    Christopher Shutler, an equity research analyst at William Blair & Co., Chicago, said the industry continued to see outflows from domestic equity strategies and inflows into global and non-U.S. strategies. In addition, “we continue to see active managers lose share to passive, particularly ETFs,” Mr. Shutler added.

    Jamie Lewin, head of manager research for Bank of New York Mellon Investment Management, New York, agreed: “On the equities side, we're seeing flows out of active and into passive/ETFs.”

    Both Messrs. Shutler and Lewin said the trend toward passive has been going on for several quarters.

    Like Legg Mason, BNY Mellon was one of the few public money managers to report an increase in AUM, with $1.646 trillion in combined assets for its BNY Mellon Investment Management and wealth management businesses as of Sept. 30, up 1% from three months earlier and 7% higher than a year ago.

    In addition to market and global factors, Mr. Shutler also noted a few money managers faced issues specific to them. Affiliated Managers Group Inc., Beverly, Mass., which owns stakes in a number of boutique money managers, experienced mutual fund outflows during the quarter, closing out the third quarter of 2014 with $179.25 billion in mutual fund assets, down 3.3% from three months earlier.

    Although AMG reported $599.47 billion in total assets at the end of the quarter, down 1.2% from three months earlier, the company posted $5 billion of net inflows, which Mr. Shutler said “was strong relative to its peer group.”

    Mr. Shutler added that AMG is benefiting from “significant exposure to global and emerging markets equities and really good positioning with institutional investors,” primarily because investors are becoming “increasingly interested in investing in boutique asset managers and in separating the alpha portions of their portfolio from the cheap beta or passive portion of their portfolios.”

    T. Rowe Price Group Inc. reported net inflows of $200 million, after experiencing net outflows of $200 million during the previous quarter, which Mr. Shutler found to be a departure from the norm for the Baltimore-based firm.

    “They have struggled with institutional outflows over the last couple of years,” Mr. Shutler said. “A lot of that is a reflection of institutional investors that began investing in T. Rowe strategies in 2008 and 2009 that had done very well, particularly in domestic equities, and are repositioning their portfolios.”

    Mr. Shutler said that isn't a reflection on T. Rowe's performance; rather, it's more a function of allocating to different asset classes and in some cases to passive.

    T. Rowe closed out the quarter with $731.2 billion in assets under management, down 1% from three months earlier.

    “Our outflows were primarily concentrated among a small number of clients,” Ken Moreland, chief financial officer of T. Rowe, said in an e-mailed response to questions. “We are confident that our strong performance track record will remain attractive to existing and prospective clients.”

    Invesco assets

    Invesco Ltd., Atlanta, reported $789.6 billion in assets at Sept. 30, down 1.6% from the end of the previous quarter but up 5.9% from a year earlier. Despite the perceived move toward passive and ETFs, the firm's PowerShares ETF business saw net outflows of $3.2 billion during the third quarter, compared to net outflows of $3 billion in the previous quarter and net inflows of $800 million in the quarter ended Sept. 30, 2013.

    Still, Invesco experienced net inflows of $2 billion in the third quarter, compared with net outflows of $8.8 billion in the previous quarter.

    “They're benefiting from very strong investment performance in their European business. They are also benefiting from the diversified nature of the platform,” said Mr. Shutler.

    William H. Gross' departure from Pacific Investment Management Co. LLC in the last days of the quarter was too late to affect flows in any significant way. However, sources believe there will be more money at play for fixed-income managers in the fourth quarter and into 2015.

    “The departure of Bill Gross was certainly a big disrupter,” said BNY Mellon's Mr. Lewin. “That's forced investors to start rethinking what to do with their fixed-income assets.”

    Mr. Lewin noted, however, that although assets are moving out of PIMCO, they're not necessarily moving toward “the next super-big fixed-income manager,” as investors might want to avoid the risk inherent to concentrating money with one large manager.

    Although Keefe, Bruyette's Mr. Lee did not comment on PIMCO specifically, he did note that “there's expected to be more money in motion over the next few quarters.” He added: “It will be a widely dispersed impact and it'll take time to play out.”

    Looking ahead, Legg Mason's Mr. Sullivan said several factors are making him more confident about the fourth quarter.

    “We're starting off in a better way,” he said. “Markets are looking better. The election is behind us. Things are quieter on the political front.” n

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