With volatility hurting returns, some traditional firms acting to address concerns over spending
Most traditional managers saw their assets under management decline during the fourth quarter, a Pensions & Investments analysis of 24 publicly held money managers found.
The drop in AUM, in part the result of volatile markets, also intensified managers' longer-term concerns about expenses and fees, which may have prompted several firms to cut staff during, or just after, the quarter, industry sources said.
Unlike alternatives firms, which are less impacted by short-term changes in asset values and generally saw AUM gains in the quarter ended Dec. 31, traditional managers "essentially earn their management fees based on the market value of the portfolios they manage," said Robert Lee, an analyst at Keefe, Bruyette & Woods Inc. in New York. "Considering what transpired in the fourth quarter with the equity market, that's why you saw assets under management decline sharply."
The S&P 500 index was down 13.5% in the fourth quarter.
Along with asset declines, managers have continued to face industry fee compression, forcing many to take a hard look at expenses, Mr. Lee explained.
"A lot of managers moved to address or tighten up spending and took steps toward realigning their expense base. … The bigger expense for a lot of managers is people," he added.
Last month, BlackRock (BLK) Inc. (BLK), New York, announced it was laying off about 500 employees, or 3% of its workforce, as part of companywide restructuring. The move occurred as "market uncertainty is growing, investor preferences are evolving and the ecosystem in which we operate is becoming increasingly complex," Robert Kapito, co-founder and president, wrote in an internal memo to BlackRock employees obtained by P&I.
BlackRock's AUM dropped 7.3% over the three months ended Dec. 31 to $5.976 trillion and dropped 5% from a year earlier, the company reported in its Jan. 16 earnings statement.
As part of its restructuring plans, the firm will focus on capacity building in four key areas: expanding the firm's technology prowess, shifting to a portfolio construction approach with clients from a product selection focus, increasing distribution capability in high-growth markets worldwide, and meeting client demands in areas such as illiquid alternatives and factor-based strategies, the memo said.
While recent job cuts at money managers are, in part, driven by volatility and uncertainty in the markets, firms are generally examining their organization and looking to outsource certain functions as well as reinvent the business, said Michael Patanella, a New York-based audit partner and asset management sector leader at Grant Thornton LLP.
"What we've seen at Grant Thornton is a lot of right-sizing at organizations, whether that be outsourcing compliance and tax functions or some of their accounting functions. Above and beyond outsourcing, (asset managers) may be using technology (in ways) they didn't previously," to cut costs, he said.
"We are also seeing artificial intelligence and a surge in technology slowly taking away some of these jobs (in asset management)," Mr. Patanella said.
Legg Mason (LM) Inc. (LM), Baltimore, which reported $727.2 billion in assets under management as of Dec. 31, down 3.7% from Sept. 30 and down 5.2% from a year earlier, announced this month it will be launching a new global operating platform across its nine affiliates under a cost-savings effort.
The global operating platform, which is still in the design phase, is expected to result in $90 million to $110 million of annual expense savings for the firm, the company revealed during its fourth-quarter earnings call.
When asked how staff would be affected by the effort, a spokeswoman said in an email: "Designing the global operating platform will require us to make challenging decisions about staffing as we bring together practices, resources, expertise and talent from across the company ... We are not in a position to estimate the size or scale of any future reductions in force at this point."
Separately, a Legg Mason affiliate implemented a downsizing plan where job cuts are expected to occur next quarter, the spokeswoman confirmed. She declined to say which affiliate would be affected or detail expected job cuts.
Other firms also announced job cuts following the volatile fourth quarter, including Brightsphere Investment Group, which reported $206.3 billion in AUM as of Dec. 31, down 13.2% from three months earlier and down 15.1% over the year. Brightsphere will undergo a 20% reduction in employees within the first quarter, which will only affect central administration staff, Guang Yang, president and CEO, said during the firm's earnings call.
The layoffs are expected to produce $8 million to $10 million in savings this year, he added.
Asset managers want to be "leaner and have faster decision-making, which means you can't have too many people near the middle or top" of the organization, said Alan Johnson, managing director of compensation consulting firm Johnson Associates Inc., New York.
Mr. Johnson said recent cuts were "about what I expected, which is moderate adjustments to headcount."
Among the 19 publicly held traditional asset managers for which P&I tracked fourth-quarter earnings, all reported declines in total AUM over the fourth quarter, with the exclusion of Federated Investors (FII) Inc., Pittsburgh. Fifteen traditional managers reported declines year-over-year.
Federated reported $459.9 billion in AUM as of Dec. 31, up 5% from Sept. 30 and up 16% from a year earlier. It attributed the asset growth in part to the Federal Reserve raising short-term interest rates four times last year, as "Federated's wide range of liquidity products offered competitive yields for investors seeking cash-management solutions," said J. Christopher Donahue, president and CEO, in the firm's fourth-quarter earnings statement. Money market assets totaled $301.8 billion as of Dec. 31, up 14% from both Sept. 30 and a year earlier.
In July, Federated also completed its acquisition of a 60% interest in Hermes Investment Management.
Among the five alternative asset managers P&I analyzed — Apollo Global Management LLC, Blackstone Group LP, KKR & Co. Inc., Carlyle Group LP and Oaktree Capital Group – all except Oaktree reported increases in AUM during the fourth quarter. Oaktree's AUM dropped 3.2% in the fourth quarter to $119.6 billion as of Dec. 31, and declined 3.5% from a year earlier.
Despite the turbulent fourth quarter, alternatives managers didn't see the same problems because "most of their management fees are not based on market values, but committed capital and invested capital, and they are less sensitive to short-term changes in (market) value," said KBW's Mr. Lee.
"The management fees at alternative managers tends to be much more insulated from the volatility that can occur with short-term asset values," he said, adding that alternative firms "have not faced the types of asset, revenue and fee pressures that traditional managers have faced, (which were) exacerbated by the fourth quarter."