Alts managers only ones to avoid Q1 declines

Large traditional asset managers hemorrhaged assets in the first quarter of 2022 as investors felt the effects of rising inflation, a Federal Reserve committed to aggressively pushing interest rates higher and an ongoing war in Ukraine that has pushed up commodity prices and raised myriad geopolitical worries. However, some alternative asset managers saw net inflows in the first quarter as investors searched for returns outside of conventional securities.

According to data compiled by Pensions & Investments, among 25 U.S. asset managers that had reported first-quarter results by May 5, only six — all alternative asset specialists — saw their assets under management climb over the past quarter, while the bulk of firms suffered losses in AUM, with London-based Janus Henderson Group PLC losing 16.5% of its assets in the quarter, the highest percentage decline among the group, but in part from selling quantitative equity subsidiary Intech Investment Management.

The Bureau of Labor Statistics reported in mid-April that its consumer price index climbed 8.5% in March year-over-year, the steepest such rise since December 1981.

Amid this backdrop, almost all major equity and bond indexes lost value in the first quarter. The S&P 500 index dropped 4.6%, the technology-heavy Nasdaq Composite index dropped 8.9%, the Russell 3000 fell 5.3% and the MSCI ACWI ex-U.S. declined 5.3%. In fact, the S&P 500 posted its worst quarterly performance since it plunged 19.6% in the first quarter of 2020, at the onset of the COVID-19 pandemic, according to Howard Silverblatt, senior index analyst-product management at S&P Dow Jones Indices.

Among fixed-income securities, the Bloomberg U.S. Aggregate Bond index returned -5.93% in the first quarter, its worst three-month return since the first quarter of 1980 when it returned -8.71%, according to Bloomberg.

Amid such an economic backdrop, asset managers faced some struggles.

Baltimore-based T. Rowe Price Group Inc., which saw an 8.1% drop in quarterly AUM to $1.56 trillion, said in its earnings release April 28 that while multiasset, fixed income and alternative products witnessed net inflows of $6.7 billion, $5.3 billion and $800 million, respectively, in the quarter, that was offset by $18.1 billion in net outflows from equity strategies, resulting in net outflows of $5.3 billion in the first quarter.

T. Rowe Price noted in its earning release that "equity redemptions were concentrated in U.S. large-cap and global equity products as we continue to see adverse flow trends, particularly on our large book of growth-oriented strategies."

New York-based Morgan Stanley Investment Management, which had the third biggest AUM decline in the first quarter at 7.5% to $1.45 trillion, saw net outflows of $7.5 billion, $3.9 billion and $3 billion from its equity, fixed income, and alternative and solutions strategies, respectively, during the first quarter.

"AUM were impacted by market volatility and outflows in the current period," Morgan Stanley said in its earnings release April 14, referring to its investment management unit.

The six alternative asset managers that saw their AUM increase in the first quarter — The Carlyle Group, up 8%; Blue Owl Capital Inc., up 7.9%; Ares Management Corp., up 6.3%, Blackstone Inc. up 3.9%; Apollo Global Management Inc., up 3.1%; and KKR & Co. Inc., up 1.8% — generally attracted inflows into alternatives or pumped up AUM via acquisitions.

For example, in an April 28 news release, Washington-based Carlyle Group attributed $15 billion of the quarterly AUM increase to its acquisition of alternative investment management firm CBAM Partners LLC, announced March 9, while other increases were derived from "appreciation across our carry fund portfolio and fundraising activity."

Overall, Carlyle had AUM of $325 billion at the end of the first quarter.

Blackstone also saw large inflows, including $17 billion into real estate, $9.2 billion into private equity and $4 billion into hedge fund strategies in the first quarter, according to its April 21 earnings release. Blackstone had total AUM of $915.5 billion as of March 31.

On an annual basis, however, most asset managers tracked by P&I gained AUM, with Blue Owl Capital jumping by 75.9% to $102 billion as of March 31, and Ares delivering a 56.9% surge to $325 billion as of March 31, making them the best performers.

Blue Owl in its May 5 news release attributed its AUM jump partly to "capital raised in direct lending" and "deployment activity in direct lending."

Ares in its April 28 earnings release partly attributed its year-over-year AUM increase to fundraising as well as to the acquisition last year of Landmark Partners LLC, which manages private equity, real estate and infrastructure secondaries and had nearly $20 billion in AUM at the time.

Only four asset managers, Boston-based Brightsphere Investment Group Inc., Janus, San Mateo, Calif.-based Franklin Resources Inc. and Milwaukee-based Artisan Partners Asset Management Inc. showed decreases in yearly AUM, dropping by 24.1%, 10.9%, 1.4% and 0.4%, respectively.

Brightsphere in its May 5 earnings release attributed its AUM declines to "market decline and net outflows." Brightsphere had total AUM of $110.2 billion as of March 31.

Joshua Zwick, a New York-based partner in the financial services practice at Oliver Wyman, a management consulting firm, said that a "very tough market" caused the AUM declines at most asset managers, coupled with both active equity and fixed-income products suffering net outflows.

Net flows varied widely among the tracked asset managers. BlackRock had $86.3 billion in net inflows in the quarter, while Morgan Stanley Investment Management suffered net outflows of $42.5 billion, including $28.1 billion in liquidity and overlay services.

BlackRock's total AUM as of March 31 amounted to $9.57 trillion, down 4.4% from Dec. 31, according to its April 13 earnings release.

By asset type, BlackRock's first-quarter inflows were dominated by equity strategies at $76 billion. By client type, ETFs drew in the most, at $56.2 billion.

Christy Loop, an Atlanta-based senior director and investments portfolio manager at Willis Towers Watson PLC, said her firm has seen that ongoing client demand for real assets, liquid alternatives and alternative credit often "lead to reduced allocations within equity and, to a lesser extent, investment-grade fixed income."

Revenue generation was difficult in the first quarter, with all but two asset managers tracked by P&I suffering revenue decline. Goldman Sachs Asset Management showed the biggest quarter drop in revenue — an 81.1% plunge in revenues to $546 million.

In its April 14 earnings release, GSAM attributed the drop primarily to "net losses in equity investments and significantly lower net revenues in lending and debt investments." GSAM also saw its revenues plunge by 88.2% year-over-year; however most other asset managers had either flat annual revenue growth or modest revenue increases ranging up to 22%.

Blue Owl and New York-based liquid real asset specialist Cohen & Steers Inc. delivered the largest percentage annual revenue gains of 155% and 22.6%, respectively, to $276 million and $154 million. According to Blue Owl's first-quarter results, its management fees nearly tripled year-over-year to $247.6 million in the first quarter.

Looking at the rest of 2022, the uncertainties of the war in Ukraine and rising inflation and interest rates make it a difficult time for equities, Oliver Wyman's Mr. Zwick said. That could lead to sustained AUM declines at some traditional asset managers, especially as active flows remain weak or negative.

But Mr. Zwick noted that alternative investments such as private equity, real estate and infrastructure have performed well from a flow perspective, and investors are likely to continue seek to reallocate to these segments of the market.

"(Investors) have to get real returns somewhere, and inflation can weigh on the rest of the market," he said. "The question is, do asset management firms have the right products and capabilities to meet this demand?"

Scott Gockowski, New York-based senior manager at asset management consultant Casey Quirk, a Deloitte Consulting LLP business, said that while alternative assets have attracted significant inflows so far this year, most investors remain below their targets, suggesting more firms might potentially expand their footprint into these assets as demand increases.

Indeed, such alternative assets as infrastructure and real estate could provide protection from inflation, adding to their appeal to institutional investors, Mr. Gockowski added.