Manager earnings crimped by return of volatility

Although the stock market started out strong, volatility led to lackluster earnings results for public money managers in the quarter ended March 31.

"Most firms had a challenging quarter for organic growth and flows," said Robert Lee, a managing director and equity analyst at Keefe, Bruyette & Woods Inc., New York. "The quarter started off (strong) and then after January when volatility hit, you had this general slowdown in activity and new sales."

He added, "I think at the end of the day, it's going to be a pretty lackluster quarter for new business for a lot of firms."

Of the publicly traded investment firms that Pensions & Investments tracks, 10 of the 15 firms that had reported their earnings as of April 27 saw assets under management fall from the prior quarter. On a year-over-year basis, however, all but one — San Mateo, Calif.-based Franklin Resources Inc. — enjoyed asset growth.

Nine of 14 managers experienced inflows for the quarter; Chicago-based Northern Trust doesn't report flow figures.

Although 2017 was a strong year for net revenue growth, due in part to capital market appreciation, Amanda Walters, senior manager at Casey Quirk, a practice of Deloitte Consulting LLP in New York, suggested that for the first quarter, "we'll probably see more of a mixed bag in terms of performance."

Ms. Walters said that even though some firms are continuing to grow revenues, "others are facing margin contraction because of fee compression and because they're reinvesting more in the business. So the costs are rising, but they're in line with revenue."

Another challenge, Ms. Walters noted, is that managers are having to "compete over the same pool of assets that's shrinking over time. So, it's become a takeaway game from one manager to the next."

Money managers are noticing the impact market volatility is having on their earnings.

"After a strong start to the year, driven by optimism related to U.S. tax reform and global economic growth, markets reversed in February and March as escalating trade tensions, inflationary concerns and a flattening yield curve caused investors to pull back," said Gary S. Shedlin, BlackRock (BLK) Inc. (BLK)'s chief financial officer in the New York-based money manager's earnings call with investors on April 12.

BlackRock's AUM totaled $6.317 trillion, up 0.5% from the previous quarter.

Patrick Davitt, a partner and research analyst at Autonomous Research U.S. LLP in New York, noted that the strong January led to sell-offs later in the quarter.

"A lot of flows were driven by the strong markets in January," Mr. Davitt said, adding that, as an example, "almost 70% of (T. Rowe Price Group Inc.'s) inflows (for the quarter) came from January."

Not only did T. Rowe Price see its AUM grow by 2.3% for the quarter and 17.7% for the year, but the Baltimore-based manager also topped $1 trillion in AUM, with $1.014 trillion — it's highest figure ever — as of March 31.

Net inflows for T. Rowe for the quarter ended March 31 were $11.3 billion, compared to net inflows of $3.7 billion for the fourth quarter and net inflows of $700 million for the quarter ended March 31, 2017.

New York-based Blackstone Group reported a record $449.6 billion in AUM as of March 31, up 3.6% from Dec. 31 and up 22% year-over-year. Inflows for the quarter were $18.2 billion, vs. inflows of $62.2 billion in the fourth quarter of 2017 and $14 billion in the quarter ended March 31, 2017.

In addition, observers noted managers are continuing to reinvest in their operations, particularly technology capabilities.

"There's talk of big data, so managers have to invest in that," Mr. Lee said. "You're still going to have to spend money to maintain competitiveness. So that's where most managers are right now."

Casey Quirk's Ms. Walters agreed. "There's a much bigger focus on technology," she said. "A lot of the big firms are developing robust strategies around technology. A lot of that cost we see is attributed to technology."

Mr. Davitt from Autonomous Research said that "those that can invest (in their companies) are really ramping that up." He added: "It's the right thing to do. If you have the ability to do it, you should."

Reporter Rick Baert contributed to this story.