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Money Management

Rising stock prices a welcome gift for managers

T. Rowe Price’s William J. Stromberg pointed to strong markets and investors returning from the sidelines after December’s volatility as big reasons for his firm’s asset boost.

Assets of publicly traded firms higher in first quarter following months of woe

A big market rebound in the first three months of 2019 produced a welcome lift in assets under management for most publicly traded money managers for the quarter ended March 31, Pensions & Investments' analysis of earnings reports showed.

All but one of the 23 managers that reported earnings by P&I's deadline had positive net AUM growth ranging from 2.3% to 12.4% in the three-month period, a sharp contrast to the prior quarter, when 20 of the 26 publicly traded managers experienced a decline in assets.

The Standard & Poor's 500 index returned 13.07% in the quarter ended March 31 compared to -13.97% in the prior quarter.

"The rebound in the first quarter helped most firms, and flow trends were relatively better than in the generally abysmal fourth quarter," said Robert Lee, executive director – equity research and analyst at Keefe, Bruyette & Woods Inc., New York.

P&I's analysis found that 14 of the 23 publicly traded managers had experienced AUM growth for the year ended March 31. Just seven of those managers produced higher growth in the year than in the quarter. Five of those were alternative investment managers.

"Given the harsh negativity in the fourth quarter, Q1 has been a kind of respite for managers but though it seems like overall growth is eking its way up, it is essentially flat. There's still long-term deterioration in margins, AUM and investment inflows," said Tyler Cloherty, senior manager and head of the knowledge center of Darien, Conn.-based consultant Casey Quirk, a practice of Deloitte Consulting LLP.

"Revenue increases bumped up margins a bit in the first quarter but it's not at a rate that's sustainable," Mr. Cloherty added.

KBW's Mr. Lee agreed, noting "revenue is volatile. When the market goes up, revenue goes up and when it goes down, so do revenues."

"After a tough quarter like the fourth quarter, it takes time for revenue levels to recover. Business pressure can diminish the impact of positive market," Mr. Lee said, adding that to reduce pressure, "many asset managers are trying to get their costs aligned with the reality of their revenue streams."

Lower revenues

Analysis of the revenues of publicly traded managers in the first quarter 2019 found that 15 of 23 firms had lower revenue than in the quarter ended Dec. 31 when 19 of 26 managers experienced revenue declines.

The list of managers with the most growth in the quarter ended March 31 was dominated by multiasset firms offering mostly traditional investment strategies.

T. Rowe Price Group Inc., Baltimore, led the list with a 12.4% gain in the first quarter to $1.082 trillion in assets under management. T. Rowe Price's 6.7% asset growth for the year ended March 31 was roughly half that of the most recent quarter:

William J. Stromberg, president and CEO of the Baltimore-based firm, attributed growth in the quarter to "strong recovery in the markets and investors partially returning from the sidelines after the volatility in December" in the firm's latest earnings statement, adding that redemption activity decreased relative to the previous quarter.

In rank order by asset growth in the quarter ended March 31, T. Rowe Price was followed by Artisan Partners (APAM) Asset Management Inc., up 12% in the quarter to $107.8 billion and down 6.1% for the year; State Street Global Advisors, up 11.7% in the quarter to $2.805 trillion and up 2.8% for the year; Franklin Resources Inc., up 9.6% in the quarter to $712 billion but down 3.4% for the year; and BlackRock (BLK) Inc. (BLK), up 9% to $6.515 trillion in the quarter and up 3.1% for the year.

Market gains in the first quarter made an appreciable difference in the AUM growth for some publicly traded asset managers.

BrightSphere Investment Group PLC, for example, attributed its 7.8% asset increase in the first quarter to market appreciation of $17.8 billion, offset by $1.8 billion of net outflows. Over the year ended March 31, BrightSphere's AUM declined 7.4%, its earnings report showed. BrightSphere's headquarters is in Boston.

For the year ended March 31, four of the five managers with the highest AUM growth were alternative investment managers.

Heading the list was Federated Investors (FII) Inc., a diversified manager that saw its AUM rise 23.6% to $485 billion in the year ended March 31 and increase 5.4% in the quarter.

Part of Federated's AUM growth for the year was due to the addition of $47 billion from its July 2018 acquisition of a majority stake in Hermes Investment Management, the firm's most recent earnings report said.

Federated's assets are destined to increase again due to the firm's addition of about $14 billion in equity, fixed-income and money market assets from the acquisition of PNC Capital Advisors, a division of PNC Financial Services Group Inc., by the end of the year, a May 7 announcement said.

Following Federated for yearly growth was Apollo Global Management LLC, up 22.4% to $303 billion in the year and 8.1% in the quarter ended March 31; Ares Management Corp., up 21.5% for the year to $137 billion and up 4.6% for the quarter; Blackstone Group LP, up 13.8% to $512 billion — a record high for the firm — and up 8.4% in the quarter; and KKR & Co. LP, up 13.1% to $200 billion and up 2.5% for the quarter.

Acquisition boost

Like Federated, assets managed by Franklin Resources, San Mateo, Calif., were bolstered through an infusion of $26 billion from the February acquisition of credit specialist hedge fund manager Benefit Street Partners LLC, New York, the company said in its April 26 earnings call.

In October, Franklin Resources said it was acquiring Benefit Street to beef up the alternative investment capabilities of its investment management unit, Franklin Templeton (BEN) Investments (BEN), "at a time when investors are increasingly allocating capital to less liquid and higher yielding credit opportunities," a news release said.

Many managers are turning to acquisitions to amass assets as well as to broaden their investment capabilities and find cost synergies, Casey Quirk's Mr. Cloherty said.

"Managers are seeking scale," he said, not only in assets but also in client service, distribution, data management and other operations.

Through the integration of an acquired firm, the buyer can pick the best of two front and back offices as well as investment management talent and ultimately achieve cost savings, Mr. Cloherty said.

Invesco (IVZ) Ltd., Atlanta, announced in October that it will acquire OppenheimerFunds Inc. The deal is expected to close in the second quarter, giving Invesco an asset boost to more than $1.2 trillion from $955 billion as of March 31, the company said in its most recent earnings statement.

Beyond a bump in AUM, Invesco President and CEO Martin L. Flanagan said in the earnings report that the company "made significant progress toward the integration of OppenheimerFunds, which will accelerate our growth strategy, strengthen our scale and client relevance (and) expand our comprehensive suite of differentiated investment capabilities."

Invesco also expects to achieve "targeted expense synergies of $475 million through a planned combination of middle- and back-office rationalization, location strategy and leveraging the scale of the global operating platform," the earnings report said.

As of March 31, Invesco's assets rose 7.5% in the year and 2.2% in the quarter.