Fiduciary rule's approach dominates earnings calls

The impending fiduciary rule is looming over the money management industry, which experienced a mixed performance in the first quarter.

Although the Department of Labor rule — which expands the definition of fiduciary investment advice but clarifies that plan sponsors can continue to provide education without triggering fiduciary duties — won't go into effect until next year, it was “one of the most, if not the most, popular topics on earnings calls,” said Christopher Shutler, a Chicago-based equity analyst with William Blair & Co., in an interview.

Though it is still “too early to tell what the impact will be,” Mr. Shutler said he believes the new rule “will continue, if not accelerate, some of the trends” in money management.

Those trends include moves toward lower fees, institutional share classes, passive investing and fee-based accounts.

Robert Lee, an analyst and managing director with Keefe Bruyette & Woods Inc. in New York, said the fiduciary rule will affect money managers, but it will do so “in a derivative fashion” in most cases.

“I'd say it's generally a negative for many managers, but you can't really quantify it. The costs will be much more onerous on distributors,” Mr. Lee said in an interview.

“A lot of managers have struggled to generate organic growth, so it's just another headwind for many of them,” Mr. Lee added.

Managers are currently assessing the impact of the new rule and how they will adjust.

Marianne Lake, New York-based chief financial officer at J.P. Morgan Asset Management parent J.P. Morgan Chase & Co., addressed the DOL's final fiduciary rule in an earnings call on April 13, telling analysts “it's a long and complex set of requirements” that “will take time to fully digest.”

Ms. Lake noted that upon first read of the rule, she saw “no significant new provisions from the proposal” that would change J.P. Morgan's position of having been “a fiduciary for over 150 years.”

JPMAM reported $1.676 trillion in assets under management as of March 31, down 3% from Dec. 31 and down 5% from March 31, 2015. Net outflows for the quarter were $47 billion.

In a conference call to investors on April 14, BlackRock Inc. Chairman and CEO Laurence D. Fink said the DOL's fiduciary rule “has implications for both our clients (and) in our own business,” and the firm was “reviewing the final rule to thoroughly assess its implications.”

Ultimately, Mr. Fink said it is likely that, as a result of the rule, BlackRock will see changes in its “distribution partners' accounts and fee structures, their product preferences and ... use of technology to both build portfolios for clients and to manage their increased risk and ... compliance needs.”

BlackRock's assets totaled $4.737 trillion as of March 31, up 2% from three months earlier but down 1% from a year earlier. Net inflows to BlackRock's long-term strategies for the first quarter were $36.1 billion.

Ed Costello, spokesman for Federated Investors Inc., said in an e-mail that officials at the Pittsburgh-based money manager are analyzing the new rules and their applicability to its business.

“We believe Federated is well-positioned on the product front. We believe our separately managed account products are well-suited for fiduciary applications,” Mr. Costello added.

Federated reported $369.7 billion in assets under management as of March 31, up 2% from three months earlier and up 4% from a year earlier.

In terms of how public money managers fared in the first quarter, both Messrs. Shutler and Lee described the quarter as “mixed.”

Of the 18 publicly traded money managers that had released their quarterly earnings as of May 10, 10 firms saw assets grow during the first quarter, while five firms experienced declines.

Meanwhile, three firms —Morgan Stanley Investment Management, T. Rowe Price Group Inc. and Legg Mason Inc. — experienced no movement in AUM from the previous quarter.

While companies like BlackRock, T. Rowe Price and Affiliated Managers Group Inc. enjoyed solid inflows during the quarter, others, including Legg Mason and Artisan Partners Asset Management, struggled with outflows.

New York-based BlackRock's first-quarter results reflected $36 billion of long-term net inflows, representing an annualized organic growth rate of 3%.

Mr. Fink, who said in the firm's conference call that BlackRock saw “diverse inflows in (a) very volatile market,” attributed the growth to a “heightened level of client engagement.”

Mr. Shutler said AMG continued to benefit from its exposure to alternatives, as well as global and emerging markets equities through its affiliates.

AMG reported $642 billion in AUM as of March 31, up 5% from three months earlier and up 1.6% from a year earlier. Net inflows for the quarter were $5.1 billion.

And despite its AUM being flat for the quarter, T. Rowe has been benefiting from its positioning in the 401(k) plan and target-date fund market.

“The majority of T. Rowe's inflows were in target-date strategies,” Mr. Shutler added.

T. Rowe reported net inflows of $5.1 billion for the first quarter. The firm's overall net cash inflows for the first quarter include $4.2 billion that originated in its target-date retirement portfolios, which totaled $172.6 billion in assets as of March 31.

“Considering how volatile the environment was, a reasonable number of companies managed to have a good quarter in terms of generating organic growth,” Mr. Lee said.

While a number of firms experienced net inflows, Mr. Shutler noted that some managers, such as Artisan and Waddell & Reed Asset Management Group, faced outflows connected to performance issues.

Artisan reported AUM of $97 billion as of March 31, down 2.8% from three months earlier.

In a conference call with analysts on April 26, Milwaukee-based Artisan's President, CEO and Chairman Eric Colson said the decline in AUM was due in part to net outflows of $1.3 billion from U.S. value equity strategies.

Artisan had announced in late February it was closing its U.S. small-cap value strategy and Artisan Small Cap Value Fund and will merge the assets with the Artisan Mid Cap Value Fund in late May.

During the call, Mr. Colson said there is less demand for active strategies that focus on outperforming an index and a greater emphasis on higher value-added strategies.

Mr. Colson also noted “the movement away from index-focused strategies has opened the door for more degrees of investment freedom for traditional managers.” This means broader investible universes like global equities.

However, these changes in demand have also been accompanied by “an unfortunate shortening of investment time horizons,” he said.

“Today, too many investors have shortened their holding periods and no longer have the patience for disciplined risk-taking to pay off. As an investment manager, we have to be cognizant of that change,” Mr. Colson said.

Looking forward, Mr. Lee noted a challenge brought on by new accounting rules that are expected to create more volatility in earnings.

Those new rules can require a company to consolidate income from an investment fund they manage. Depending on the structure of the fund, the fund could create volatility in earnings as its returns might show up as investment income each quarter for better or worse, but might not reflect the revenue the firm actually generates or the actual capital at risk.

“The comparability of earnings is becoming more challenging, because there's more of a noise on reporting earnings around changes of accounting that create this volatility in earnings,” Mr. Lee explained.

Mr. Lee added the reported earnings used to be a good proxy for the cash that money managers were generating. However, that's not the case anymore.

“Oftentimes, (reported earnings) can obscure what's going on at the company,” he said. “What difference does it matter if some seed capital was up 3% one quarter and then down 3% the next? It doesn't tell you how the business operated.” n