COVID-19 puts manager assets into deep dive

Aggregate assets managed by publicly traded money managers fell 10% to $24.31 trillion in the first quarter amid the coronavirus-induced market plunge — the worst quarterly decline since the fourth quarter of 2008 when total assets fell 11.5%.

The damage to global markets from the impact of the coronavirus pandemic in the quarter ended March 31 "revealed the haves and have-nots and widened the gap between the leaders and laggards," said Michael J. Cyprys, senior analyst covering asset managers and brokers, in New York-based Morgan Stanley Institutional Securities.

Managers' bottom lines also took a hit, with 20 of the 25 publicly traded managers Pensions & Investments tracks reporting lower revenue on a quarter-to-quarter basis as of March 31.

Only two managers had positive revenue growth in the first quarter, 20 managers reported negative revenue growth, and three firms did not provide revenue in their earnings releases.

Money managers offering a diverse array of investment strategies and those with existing scale in cash management fared much better in the first quarter than firms with narrower offerings, especially those focused on equities, which were hit hard by market declines, industry sources said.

"It was not surprising to see drops in assets under management as markets severely contracted in the first quarter, especially in March," said Mathias Neidert, managing director and head of public market research for investment consultant bfinance International Ltd., London.

"There was certainty about the fact that managers would lose money because of performance losses. Nothing worked in the quarter. Equity managers had more pronounced declines than managers with more diversified strategies. The question is whether these firms suffered outflows as well," Mr. Neidert said.

To Mr. Neidert's point regarding performance, the S&P 500 index was down 20% in the quarter while the Bloomberg Barclays Aggregate U.S. Bond index was up 3.1% and the Bloomberg Barclays Long Treasury Total Return index was up 20.9%.

Federated Hermes Inc., Pittsburgh, and Morgan Stanley Investment Management, New York, were the only two money managers that had positive asset growth in the first quarter within the universe of 25 publicly traded money managers and banks with internal asset management units tracked by P&I.

Federated Hermes' assets totaled $605.8 billion as of March 31, up 5.2% for the quarter. Morgan Stanley's AUM increased 5.8% to $584 billion in the quarter.

"Institutional investors were the driver of net growth in the first quarter," said Morgan Stanley's Jacques Chappuis, managing director, global head of distribution and co-head of the firm's solutions and multiasset group.

The firm had net inflows of $57.3 billion in the quarter ended March 31, $50.6 billion of which was invested in liquidity strategies. The remaining $6.7 billion in net inflows were to long-term strategies, with $3.8 billion going into alternative investment strategies, $1.6 billion to equities and $1.3 billion to fixed income, Mr. Chappuis said.

He added that "one thing we've seen that's unlike (what happened) in previous down markets, is that institutional investors are culling active managers and sticking with stronger firms. We've captured a lot of that flow."

As for the remaining 23 managers in P&I's universe, AUM declines in the quarter ranged from 0.2% to $148.6 billion for Los Angeles-based alternatives manager Ares Management Corp., to London-based Janus Henderson Group PLC's decline of 21.5% to $294.4 billion.

Janus Henderson's assets declined due to a combination of $64 billion of market/foreign exchange losses, net outflows of $12.2 billion and $4.2 billion of unidentified disposals, its April 30 earnings report showed.

More money managers saw gains in their AUM in the year ended March 31 than in the quarter. Eleven managers experienced growth, among them Federated Hermes, which gained 24.9% and Morgan Stanley, 21.7%.

Assets managed by Victory Capital Holdings Inc., San Antonio, Texas, increased 113% to $123.8 billion for the year ended March 31, primarily due to the acquisition of USAA Asset Management Co. on July 1, which added about $60 billion to the manager's AUM.

Among the 14 money managers with lower AUM during the 12 months ended March 31, Brightsphere Investment Group Inc. suffered the largest decline at 27.2% to $161.8 billion, primarily due to market depreciation of $43.5 billion, its May 7 earnings statement showed.

Regarding net flows in the quarter, P&I's manager universe split evenly, with 12 managers experiencing positive net flows and 12 seeing net outflows in the first quarter. One manager in the universe does not report quarterly flows.

A bright spot within P&I's quarterly data was the positive net flows from all five alternative investment managers in the universe.

Blackstone Group Inc., New York, reported $20.9 billion of net inflows in the quarter; Apollo Global Management Inc., New York, $6.2 billion; Ares Management, $6.1 billion; The Carlyle Group, Washington, $3.2 billion; and KKR & Co.Inc., New York, $2.2 billion.

Despite positive net inflow in the quarter, these alternative investment managers still experienced AUM declines in the quarter ended March 31.

Blackstone managed $538 billion, down 5.8% for the quarter but up 5.1% for the year; Apollo managed $315.5 billion, down 4.7% in the quarter and up 4.2% for the year; Carlyle Group's AUM of $216.9 billion was down 3.4% in the quarter and down 2.1% in the year; and KKR's AUM was down 5.2% in the quarter to $207.1 billion and up 3.8% in the year.

J.P. Morgan Asset Management, New York, reported the highest net inflow of $85 billion in the quarter among the managers in P&I's universe, while Franklin Resources Inc. experienced the highest net outflow at $25.4 billion.

As of March 31, J.P. Morgan Asset Management managed $2.24 trillion, down 5.3% in the quarter and up 6.8% for the year, while Franklin Resources Inc. managed $580.3 billion, down 16.9% in the quarter and down 18.5% for the year.

While $98.2 billion of Franklin's AUM decline of $118 billion in the quarter was due to performance losses which led to "elevated redemptions this quarter," Franklin said in comments accompanying its earnings report, most of J.P. Morgan's net inflows — $75 billion — went into liquidity strategies, according to its earnings release.

Cash was king for J.P. Morgan Asset Management and Morgan Stanley Investment Management and other large managers in P&I's universe during the first quarter.

Goldman Sachs Group Inc., New York, had net inflows of $72 billion into its liquidity strategies, up from $58 billion in the prior quarter, according to the firm's April 15 earnings statement.

The firm had $1.82 trillion in assets under supervision as of March 31, down 2.2% in the quarter and up 13.7% for the year.

The $52.4 billion that flowed into BlackRock's cash management strategies — a new quarterly high — more than offset $18.7 billion in outflows from long-term strategies, said Laurence D. Fink, BlackRock's chairman and CEO, during an April 16 analyst call.

Mr. Fink attributed most of the cash net inflows to investors moving assets to safety during the turbulent quarter and said that about $40 billion of flows into cash were from institutional investors exiting indexed strategies.

BlackRock managed $6.47 trillion as of March 31, down 12.9% in the quarter and down 0.8% for the year. State Street Global Advisors, Boston, managed $2.69 trillion as of March 31, down 13.7% from the prior quarter, mostly from $466 billion of market and foreign exchange losses, the April 17 earnings statement from its parent company State Street Corp. showed. AUM was down 4.1% for the year.

During the bank's April 17 earnings call, Ronald P. O'Hanley, president and CEO of State Street Corp., highlighted SSGA's $39 billion of positive net flows, of which $32 billion was invested in cash funds.

Federated Hermes' money market assets hit a new record high of $451.3 billion, up 14.2% from the prior quarter and up 41.7% for the year.

Liquidity strategies are "a very core business for Federated Hermes," said J. Christopher Donahue, Federated Hermes' president and CEO, in an interview. "We've been running these funds since the 1970s and it's not a sideshow for us," noting that the firm has "gained new money market clients including pension funds, endowments, corporations and municipalities for which cash is really important" since the outbreak of the COVID-19 pandemic.

Companies including BlackRock, Morgan Stanley and other firms with both active investment and cash strategies were able to accommodate investors that wanted to move assets out of riskier strategies to the safety of cash, sources said.

"Firms that have diversity across investment strategies benefited compared to their peers as they captured flows on the other side as investors derisked out of equities and bonds and moved to cash," said Morgan Stanley analyst Mr. Cyprys.

He said that money managers with large-scale cash management capabilities saw meaningful inflows to liquidity strategies in the quarter, but noted that fees for cash management strategies are fairly low in comparison to the asset classes those flows likely moved from.

While only two managers reported positive revenue growth in the first quarter, more managers — 15 — saw revenue increases for the year ended March 31. Revenue declined for seven managers and three firms did not provide revenue figures.

"Margins declined because revenues went down faster than costs. It's a continuing trend," said Amanda Walters, a New York-based principal of Casey Quirk, a practice of Deloitte Consulting LLP, adding "there may be some margin compression if this continues, but revenue generated by the investment industry remains stronger than in many other industries."

"We definitely see interest in cost management from managers, but it's not clear that this will be a big focus in the short term," she said.

Ms. Walters said that she and her colleagues at Casey Quirk are busy advising money managers about their businesses given the results in the first quarter and stressed that "the initial panic mode about the first quarter was short-lived. There was a significant market drop in March, but the S&P 500 has rebounded since then."

She added that "from a market perspective, the current environment could be relatively positive for managers."

Staff writers Sophie Baker, James Comtois, Arleen Jacobius, Rob Kozlowski and Danielle Walker contributed to this story.