Manager assets roar back but revenue restrained

Publicly traded money managers saw their assets under management rebound in the second quarter, even as revenues were slower to recuperate from COVID-19-related drawdowns felt in the first quarter.

Of the 22 publicly traded money managers tracked by Pensions & Investments that reported by Aug. 5, all saw an increase in AUM over the first quarter. By comparison, in the first quarter, only two managers in a universe of 25 firms — Federated Hermes Inc., Pittsburgh, and Morgan Stanley Investment Management, New York — reported positive asset growth over the previous quarter.

Second-quarter asset growth ranged from 2% reported at Washington-based Carlyle Group Inc., which had $221.3 billion in AUM, to 26.7% reported at Milwaukee-based Artisan Partners Asset Management Inc., which had $120.6 billion as of June 30. Most of Artisan's $25.4 billion growth in the quarter was performance-driven, with market gains of $22.1 billion, the firm reported in its earnings release.

While AUM rebounded in the second quarter, 10 firms had positive revenue growth and 12 managers reported a decline in revenue.

"If AUM continues to bounce back, the benefit of that will be visible (via revenues) in the third quarter," said Dean Ungar, vice president, senior credit officer at Moody's Investors Service Inc., New York.

"We've seen revenues under pressure. That's not surprising because at the end of the first quarter, AUM was down a lot, more than 10% because of the market disruption (caused by) the coronavirus. We knew that the AUM starting point was going to be low," he added.

In the first quarter, aggregate assets managed by publicly traded money managers fell 10% to $24.31 trillion amid the historic market sell-off caused by the COVID-19 pandemic, P&I reported in May. The event marked the worst quarterly decline since the fourth quarter of 2008, when total assets fell 11.5%.

In the second quarter, a major area of asset growth for firms was fixed income, as many investors took flight to safe haven assets.

BlackRock Inc., New York, saw record quarterly net inflows of $57 billion in its iShares fixed-income ETFs during the second quarter, Gary S. Shedlin, senior managing director and chief financial officer, said during the firm's earnings call.

In total, BlackRock had $100.2 billion of total net inflows in the second quarter, of which $60.3 billion were derived from fixed-income products.

Inflows to its fixed-income ETFs specifically were "driven by renewed investor appetite for fixed income and acceleration in long-term secular growth trends and even stronger investor confidence in fixed-income ETFs following their strong performance in that market stress earlier this year," Mr. Shedlin said during the call.

Martin L. Flanagan, president and CEO of Atlanta-based Invesco Ltd., similarly noted in an earnings statement that "long-term flows into fixed-income capabilities were strong" during the second quarter.

Fixed-income strategies were the only asset class to report second-quarter long-term net inflows, at $6 billion. Invesco had $14.2 billion in long-term net outflows in total, with $17.4 billion in net outflows from equity strategies, $800 million in net outflows from "balanced" strategies and $2 billion in net outflows from alternatives, its earnings release said.

Brooks K. Hamner, a vice president on the investment management team at Mercer Capital Management Inc., a business valuation and financial advisory services firm in Memphis, Tenn., said fixed-income inflows at firms were "indicative of a flight to safety (by investors) after what happened in March."

"We did see a fair amount of inflows into fixed income from equities (as investors) pulled money out of stocks and put it into bonds. ... But risk aversion has waned a bit after the last few months as the markets have recovered. I think institutions are more comfortable putting money back into stocks," Mr. Hamner said.

On the heels of unprecedented market volatility and drawdowns in March, some investors also noticeably increased allocations to gold and gold-related strategies in the second quarter, firms said in earnings calls.

State Street Corp. Chairman and CEO Ronald P. O'Hanley said its gold ETF, SPDR Gold Shares, recorded its strongest ever level of inflows at nearly $12 billion during the second quarter.

Additionally, Invesco Vice Chairman Loren Starr said during the company's July 28 earnings call that while the firm had $400 million in net outflows from its ETF lineup, investor redemptions were offset in part by net inflows into its Europe, Middle East and Africa physical gold ETF.

Mr. Starr served as chief financial officer until Aug. 1, when Allison Dukes assumed the position.

In the EMEA ex-U.K. region, Invesco's business "returned to positive flows in the (second) quarter of $1.8 billion from net outflows of $1.2 billion in Q1, and that was driven by strong flows into our gold exchange-traded fund," Mr. Starr said during the call.

The product, Invesco Physical Gold ETC, saw inflows of nearly $3 billion in the first half of the year, an Invesco spokeswoman said in an email.

Inflows into gold-related products were "really more of an inflation hedge after what happened in March and the government's response with stimulus," Mr. Hamner said.

"Many investors are expecting the government to monetize that debt. As a result of that fear, many investors are putting money in gold or gold-related products as a hedge to inflation," Mr. Hamner added.

Catherine Seifert, a vice president and equity analyst at CFRA Research, New York, said allocations to gold indicate "a desperate search for safe haven assets that has lifted all vehicles, whether they be (gold-related) mutual funds or ETFs."

Mr. Ungar from Moody's further added on gold, that "in periods of tremendous uncertainty, (it) tends to be a destination for investors."

"I think we can look at this as more of a cyclical phenomenon as opposed to a long-term trend," he noted, adding that inflows into gold products are not a significant part of publicly traded money manager earnings.

As for whether institutional investors' environmental, social and governance investing goals are at odds with allocations to gold, due to mining risks or environmental impact, Mr. Ungar said for now, "whatever is happening with gold is going to be more of a cyclical thing and probably separate from an ESG discussion."

Mr. Hamner said that in his experience, gold isn't perceived to be as "dirty" as coal or other fossil fuels from an ESG standpoint. "It's not as environmentally unfriendly as a lot of commodities or certain corporations. Most (institutions) would be comfortable with at least a small allocation to gold, or gold-related products," Mr. Hamner said.