June swoon dents Q2 manager AUM

June changed everything.

Several of the largest publicly traded money managers saw assets under management slip in the second quarter because of poor market performance at the tail end, particularly in fixed income. Yet earnings and revenue were up.

The general increase in revenue and net income is “a timing issue,” said Robert Lee, equity research analyst at Keefe, Bruyette & Woods, New York.

“The key thing isn't where assets under management started or finished in the quarter, but what the average assets under management were,” Mr. Lee said. The average better reflects what fees, particularly for mutual funds, were based on, he said.

“Average second-quarter assets under management were better than the ending value.

“That's a one-quarter effect,” Mr. Lee added. “The effects will be felt in the third quarter since (AUM) will be starting off at a lower base. In a purely static world, they're starting off behind the 8-ball a little bit. A lot depends on how markets progress in the third quarter.”

William Katz, analyst at Citigroup Global Markets, New York, agreed. “Over time, average assets finished higher in the second quarter. The challenge will be what's the average in the third quarter. It's encouraging that July has been strong so far.”

Managers that filed earnings statements for the three months ended June 30 generally saw percentage asset declines in the low single digits, although Morgan Stanley Investment Management, Bank of New York Mellon Corp. and Affiliated Managers Group Inc. eked out AUM increases around 1%. However, several other firms saw big percentage jumps in net income for the second quarter — notably Legg Mason Inc., with a 63% boost, and BlackRock Inc., with 15%.

Those increases came despite market-related losses reported by most money managers, tied to a 3.3% decline in the Barclays Capital Investment Grade Bond index and the rising yield on the U.S. Treasury 10-year note, to 2.49% on June 30 from 1.84% on April 1. The Standard & Poor's 500 stock index returned 2.4% in the quarter, but that paled in comparison to its 10.61% return in the first quarter.

In percentage revenue gain, AMG led for the second quarter with a 7.7% jump, to $541 million. Only Federated Investors Inc. saw a revenue decline, down 1.8% to $223 million.

Legg Mason's and BlackRock's percentage increases in net income came despite asset declines in the quarter of 3.1% for Legg Mason, to $644.5 billion, and 2% for BlackRock, to $3.86 trillion. BlackRock remains the largest money manager, followed by State Street Global Advisors, reporting $2.146 trillion as of June 30, down 1.4%. Parent State Street Corp. reported overall net income of $571 million, up 25.5% for the quarter.

BNY Mellon and Morgan Stanley were rare examples in the second quarter of publicly traded managers with gains in both AUM and net income. BNY Mellon had $1.43 trillion in assets under management as of June 30, with net income of $272 million vs. a loss of $266 million three months earlier; while Morgan Stanley had $347 billion in AUM and a 20.2% rise in net income to $101 million.

BNY Mellon, AMG, Morgan Stanley and BlackRock were also among the leaders in net inflows in the quarter. BNY Mellon had net inflows of $21 billion; AMG, $13.1 billion; BlackRock, $11.9 billion; and MSIM, $9.8 billion.

Mr. Lee at KBW said most of the publicly traded money managers reporting for the second quarter “performed the way most people were expecting. The market's up year over year, so you'd expect good earnings growth.”

Citigroup's Mr. Katz said long term, AUM declines would affect revenue and earnings. But seasonal benefits and softening of marketing expenses in the second quarter helped keep revenue and net income growing, although a bigger driver going forward would be what markets will do.

While inflows were generally good in April and May, Mr. Katz said, “June was a difficult month, and fixed income was a big pressure point.” But looking ahead, flows should rebound if aggregate outflows in fixed income slow and if the equity markets continue to rise. “I'm hopeful the pace of attrition won't continue. But if we have another surge in rates, then all bets are off.”

Money manager holding company AMG enjoyed inflows from mandates across all geographic regions and “a notable contribution from U.S. clients into U.S. strategies,” Daniel Fannon, analyst at Jefferies & Co. San Francisco, said in a note to clients. He cited strength in institutional flows to managers held by AMG, particularly BlueMountain Capital Management LLC, AQR Capital Management LLC, Genesis Asset Managers LLP, Harding Loevner LP and Frontier Capital Management Co. LLC. “Additionally, the tone around flows in both the retail and institutional channels thus far in July was positive,” Mr. Fannon added. He could not be reached for further comment.

The jump in net income by another manager holding company, Legg Mason, is a good sign for the struggling firm. Outflows continue to be a problem; it reported $8.5 billion in net outflows in the second quarter. “To say they turned the corner might be too optimistic,” said Mr. Katz, “but I think they're stabilizing the franchise. Their challenge will be because of their asset tilt toward fixed income (through affiliate Western Asset Management); there could be headwinds there.”

Janus Capital Group Inc. continued to be hit hard, with AUM down 1.9% to $160.6 billion, net income down 43.6% and net outflows of $5.4 billion.

Efforts to turn Janus around will take time, Mr. Lee said. “Things always can change, but the question is in what time frame? Can Janus turn things around? Not particularly in the short term ... It takes a long time to turn around an asset management firm. Some have done it; it just takes time.”

Also, T. Rowe Price Group Inc. was plagued by $8 billion in net outflows in the last quarter, although AUM only fell 0.6% to $614 billion. Citigroup's Mr. Katz said T. Rowe's outflows were spurred by withdrawals in equities from non-U.S. clients, particularly sovereign wealth funds, but also from other institutional and subadvisory clients. The net outflow was a “capstone of a number of things ... it probably won't get any worse,” he said. “Performance is not the issue, it's more the personnel changes at the firm.”