Volatility was the theme for the first half of 2016, as markets oscillated between risk-averse and risk-seeking regimes, said a new report on U.S. asset managers from Moody's Investors Service.
According to the report, the Standard & Poor's 500 dropped 10.5% in the early part of the first quarter, only to rally sharply in the back half of the quarter and to date. As a result, manager revenue has been volatile.
Management fees fell 3.8% in the first quarter, driven by lower average assets under management. However, with most index averages higher in the second quarter, Moody's expects a rebound in revenue that could approach a 5.5% increase for some managers in the second quarter.
In response to that volatility, net fund outflows from equity strategies through May were $51 billion, while bond and hybrid offerings attracted $48 billion of net inflows.
Investors are continuing to redeem out of actively managed mutual funds and going into passively managed exchange-traded funds. Within ETFs, Moody’s is seeing a growing demand among asset owners for smart beta strategies that typically have a more quantitative orientation to them. Alternative managers’ net fee paying asset inflows declined but remained positive.
Revenues were down 10.2% in the first quarter. Alternative managers' incentive income declined 45.8% sequentially as they failed to meet fee hurdles, driving their revenues down 19.7%. Traditional managers, less dependent on performance fees, experienced a 7.7% revenue decline.
Moody's noted that some asset managers deployed capital to make acquisitions in the first half of 2016. For example, Legg Mason purchased Clarion Partners and EnTrust Capital in the first quarter. In addition, Affiliated Management Group recently announced it plans to acquire Goldman Sachs' Petershill Fund I's minority interests in five alternative investmEnTrust Capital EnTrust Capital in the first quarter. In addition, Affiliated Management Group recently announced it plans to acquire Goldman Sachs' Petershill Fund I's minority interests in five alternative investment firms.
Talk of M&A is likely to pick up in the second half of the year as traditional managers seek the means to diversify their offerings, the report said.
Volatility, low interest rates and stretched valuations are expected to persist, increasing investor caution. Investors grappling with this environment are likely to display low conviction, the report said, employing passive products to time exposures to lower-risk asset classes, including bond, multiasset and low-volatility funds. Traditional benchmarked active products will remain at a disadvantage, the report said.