Most publicly traded managers see AUM growth in third quarter

Aggregate assets under management by the 24 publicly traded money managers tracked by Pensions & Investments grew to $28.35 trillion at the end of the third quarter as global markets and managers continued to recover from the effects of the COVID-19 pandemic in the first quarter of 2020.

The total AUM for the universe as of Sept. 30 was 5.9% higher than the $26.76 trillion in assets as of June 30 and up 17.6% from the $24.11 trillion managed as of March 31. The Sept. 30 figure is also 5% higher than the high of $27.01 trillion as of Dec. 31, 2019.

The 10% decline in the first quarter was the worst since the fourth quarter of 2008, when total assets fell 11.5%.

All but two of the 24 reporting managers saw AUM growth during the latest quarter. In the quarter ended June 30, all managers saw a rise in total assets, but only two eked out a positive growth in the first quarter of 2020.

Markets were favorable in the third quarter, with the S&P 500 index returning 8.9% while the MSCI ACWI ex-U.S. index was up 6.3%. Fixed-income returns were muted, with the Bloomberg Barclays U.S. Aggregate Bond index up 0.6% and the Bloomberg Barclays U.S. Long Treasury Total Return (Value Unhedged) index up 0.1%.

Managers benefited from "the uplift in markets," which buoyed both assets and revenues into the fourth quarter, said Michael J. Cyprys, senior equity analyst covering asset managers and brokers in Morgan Stanley's institutional securities unit, New York.

"Overall, we've seen some decent earnings," Mr. Cyprys said, noting that many publicly traded managers reported lower expenses because of COVID-19 restrictions on business travel and cessation of other activities.

Consolidation within the investment management industry also remains on the minds of many managers seeking scale, distribution capability, broader investment strategy capabilities, new client segments and wider geographic coverage, Mr. Cyprys said. "We're seeing a pickup in merger and acquisition activity," he added.

In fact, the biggest growth in AUM within P&I's manager universe in the third quarter was the result of the largest money manager merger this year.Franklin Resources Inc.'s $4.5 billion acquisition of Legg Mason Inc. on July 31 significantly increased assets, according to the firm's Oct. 27 earnings report.

San Mateo, Calif.-based Franklin's AUM topped the $1 trillion mark for the first time, hitting $1.42 trillion with the addition of Legg Mason's $797.4 billion, an increase of 127.8% from June 30, when Franklin's assets totaled $622.8 billion. Over the one-year period ended Sept. 30, Franklin's growth including Legg Mason was 104.9%

Among managers without help of an acquisition to boost assets, alternatives specialist Ares Management Corp., Los Angeles, had the largest growth, up 13.1% to $179.2 billion.

On an Oct. 29 conference call with analysts, Michael Arougheti, Ares' president and CEO, attributed the growth to record fundraising and nearly 50% growth in realized income. The firm's credit business, its largest, saw assets rise 11.8% to $131.2 billion in the quarter and 23.4% for the year.

Federated Hermes Inc., Pittsburgh, was one of the two managers that experienced an AUM decline in the quarter. Its assets fell 2.2% to $614.8 billion, the largest drop among managers during the period.

Federated Hermes "reached record fixed-income assets under management of $79.5 billion at the end of the third quarter," J. Christopher Donahue, president and CEO, said in a news release. But the decline in total AUM was mainly the result of $11 billion of net outflows from long-term assets and a $24.7 billion decline in money market assets, the firm's earnings report showed.

Over the longer term, alternatives manager Apollo Global Management Inc., New York, had the highest AUM growth for the year ended Sept. 30, up 34.2% to $433.1 billion.

Apollo's growth primarily came from its insurance business, said co-founder Josh Harris during an Oct. 29 earnings conference call with analysts.

BrightSphere Investment Group Inc., Boston, experienced the largest AUM decline during the 12 months ended Sept. 30, down 14.8% to $184.8 billion. The decline was partly from the sale in July of Copper Rock Capital Partners LLC, which ran $2.2 billion in global equities, as well as from net outflows in the third quarter of $500 million, the earnings report showed.

An important ingredient in AUM growth in the quarter ended Sept. 30 was net flows, with 14 managers reporting net inflows in the quarter and nine reporting net outflows, the same as the prior quarter. Northern Trust Corp. didn't disclose net flows in either quarter.

BlackRock Inc., the world's largest money manager, had the highest net inflow — $128.7 billion — in the third quarter, which increased the New York-based firm's AUM by 6.7% to $7.81 trillion.

Of the inflows in the third quarter, $37 billion was from BlackRock's institutional business, its Oct. 13 earnings report showed.

BlackRock had $100 billion in net inflows in the quarter ended June 30.

State Street Global Advisors, Boston, which managed $3.15 trillion as of Sept. 30, experienced the highest net outflows at $65 billion. About $58 billion of that came from the firm's cash fund, according to parent company State Street Corp.'s Oct. 16 earnings statement.

In the previous quarter, SSGA saw total net inflows of $23 billion.

Morgan Stanley's Mr. Cyprys said that by asset class, "fixed-income strategies are experiencing strong inflows" despite lower returns because "with the low-rate backdrop, investors have a need for income."

For example, Jennifer M. Johnson, Franklin Resources president and CEO in a news release accompanying the firm's earnings report, said her firm is "already seeing the benefits of adding world-class franchises (from Legg Mason) to an already strong set of investment capabilities. Case in point, U.S. fixed income attracted record net flow of $5.7 billion in the quarter. We were pleased to see strong long-term net flows for Western Asset (Management), which reached $410 billion in long-term assets and $487 billion in total assets, both their highest levels in more than a decade."

Western Asset Management was a subsidiary of Baltimore-based Legg Mason and is now a part of Franklin.

Mr. Cyprys said equity strategies, on the other hand, had net outflows in the third quarter likely due to investors rebalancing out of equities, despite the rally in markets.

As AUM rose in the third quarter for most money managers, revenues also improved.

Twenty-one firms increased revenue quarter-to-quarter, two saw decreases and Northern Trust did not report its third-quarter revenue.

KKR & Co. Inc., New York, saw its revenue rise 42.3% to $1.9 billion without an acquisition. KKR managed $233.8 billion as of Sept. 30.

Ares Management had the largest revenue decline in the third quarter among managers in P&I's universe, down 18.7% to $490 million. While Ares' AUM grew from strong fundraising, transactions plummeted due to the COVID-19 pandemic, cutting into deployment and revenues, according to the firm's earnings report.

"Aggregate revenue among publicly traded money managers was much more positive in the third quarter than in the previous quarter and from the high-water mark at the end of the fourth quarter 2019," said Amanda Walters, a New York-based principal at Casey Quirk, a practice of Deloitte Consulting LLP.

She added that "margins are healthy but are on a downward path. Despite capital market returns propping up assets under management, we continue to see more fee pressure including persistent fee discounting on the institutional side of the business. In a hard fundraising environment, some managers may be using lower fees to attract new business."

About managers cutting costs, Ms. Walters said: "This is the first quarter in a long time that we've seen a fall in money managers' operational costs," noting costs were down about 7% year-to-date Sept. 30.