Publicly traded money management firms continued to see investors push away from active equity strategies in the first three months of 2015.
Most money management firms — including the world's largest asset manager, BlackRock Inc. — still managed to have positive net inflows, albeit small ones.
“There is lackluster interest in traditional equity strategies,” said Robert Lee, an analyst with Keefe, Bruyette & Woods Inc. in New York, who added investors are concerned about the end of the bull market in equities.
The shift is also prompting money managers to explore how they can expand their capabilities, moving beyond large-cap equity to dividend-oriented or small-cap strategies and into other areas like alternatives, said Mr. Lee.
“Every firm is looking at how to diversify its product offerings,” he said.
Milwaukee-based Artisan Partners saw net outflows in four of its five active equity strategies in the first three months of 2015. CEO Eric Colson said in an April 29 call with analysts that “institutional investors are shifting away from style-box categories and moving toward risk-based and outcome-oriented approaches.”
Mr. Colson said future investment strategies for Artisan will reflect an increasing degree of investment freedom for staff. Its newest strategy, developing world equities, will operate “relatively unconstrained” when it is introduced in the next several months, he said.
Artisan reported net outflows of $2.2 billion in the first quarter of 2015, but market gains helped bring assets under management to $108.7 billion, up 0.7% from the previous quarter and 1.2% year over year.
In an earnings call the same day, Franklin Resources President and CEO Gregory E. Johnson said company officials have seen increased investor interest in liquid alternatives strategies, run by subsidiary K2 Advisors LLC. He said two K2 strategies, started in 2013 and 2014, now have $840 million combined.
“The first few years on a new product are always tough to get going,” Mr. Johnson said. “But this one, I think, we are all very optimistic that we can expand that and really start to make a meaningful contribution of flows.”
Franklin's U.S. equity strategy saw net outflows of $600 million for the quarter; its global/international equity strategies, $1.6 billion. But despite the net outflows, Franklin, San Mateo, Calif., experienced a slight increase in total assets under management, to $880.6 billion.
Another manager that suffered equity redemptions was Baltimore-based T. Rowe Price Group. The firm had more than $4 billion in net outflows in its large-cap strategies. But Christopher Shutler, analyst with William Blair & Co., Chicago, said T. Rowe had a record $7.5 billion in target-date fund inflows. Overall, the company had $1.9 billion in net new inflows.
Mr. Shutler said T. Rowe Price officials share investor concerns that the bull market will end. “Management continues to believe that investors should have modest performance expectations for U.S. equities,” Mr. Shutler said in an April 22 research report.
T. Rowe Price's AUM of $772.7 billion was up 5% from the previous quarter and 8.6% year over year.
A second Baltimore-based manager, Legg Mason, reported $1.3 billion in net active equity outflows in the first three months of 2015. Affiliate Royce & Associates, which specializes in small- and microcap U.S. equity strategies, suffered net outflows of $2.7 billion.
Affiliated Managers Group Inc., Boston, also suffered equity outflows. In an earnings call on April 28, Nathaniel Dalton, president and chief operating officer, didn't specify a number. He said the firm had $2.9 billion in institutional inflows that came primarily from alternative strategies and global equities which were partially offset by U.S. equity outflows.
Net total inflows for the quarter were $5.3 billion; Affiliated's total AUM was $632.2 billion as of March 31, up 2% from three months earlier and up 6.4% from a year earlier.
Equity outflows or lackluster inflows have not significantly affected the high operating margins of money managers, though some firms experienced larger decreases than others.
Franklin Resources, for example, reported a 37.7% operating margin in the first three months of 2015, relatively unchanged during the past year. But Artisan Partners' adjusted operating margin dropped to 38.4% in the first quarter from 43.9%, due to what management said were startup costs for the firm's seventh investment team and seasonal expenses like 401(k) and health-care contributions. The firm had a 45.1% operating margin in the first quarter of 2014.
The trend away from active domestic equities is also part of a general concern about the investment environment, said Michael Kim, an analyst with Sandler O'Neill & Partners LP, New York.
“Broadly speaking, investors are somewhat skittish,” he said. “They lack conviction about the broader market environment. Both institutional and retail investors are avoiding allocation choices.”
Analysts say that avoidance led to relatively modest AUM gains among publicly traded managers, with much of those gains generated by market performance.
One exception to modest AUM growth in the first quarter was New York-based BlackRock, which benefited from its mostly passive iShares exchange-traded funds business to generate large inflows. Investors poured a net $70.4 billion into BlackRock's strategies overall in the first quarter, a 162% increase from a year earlier. More than half of that, $36 billion, went to fixed income.
The company reported its iShares ETFs had $35.48 billion in net inflows, with $18.6 billion of that going into fixed-income ETFs.
Overall inflows included $21 billion by institutional clients, the most since 2009. But active equity strategies accounted for just $500 million of the total. Yet that was an improvement from $25 billion in net outflows in the fourth quarter of 2014.
In BlackRock's case, the outflows were generated by more than concern about a market downturn. The company has seen performance lag peers in its equity strategies over the last several years, said Greggory Warren, an analyst with Morningstar Inc. in Chicago.
If equity strategies continue their improved performance in coming months, Mr. Warren said more inflows could be coming, helping BlackRock “boost its revenue, adding to the strong growth that has been generated by iShares.”
Another manager, Janus Capital Group Inc., Denver, reported a slight increase in its fundamental equity business in the first quarter of 2015, with net inflows of $1.6 billion. That area suffered $200 million in net outflows in the previous quarter and $2.3 billion in net outflows in the first quarter of 2014.
The quarter ended March 31, 2015, was the second quarter in a row in which Janus reported overall net inflows after 21 straight quarters of overall net outflows. Janus' strategies are reporting improved performance, but it's unclear if the performance and inflows will continue, said Erik Oja, an analyst with S&P Capital IQ.