Revenues rebound, assets climb, but pressures linger

After struggling to generate income in the first quarter, most traditional managers saw their revenues rise in the three months ended June 30, a Pensions & Investments analysis of earnings reports found.

Among 18 traditional money managers that reported second-quarter earnings by Aug. 8, all but two firms recorded higher revenues than in the prior quarter. Bank of New York Mellon Corp. saw revenues for its investment management business drop only slightly, nearly 1%, to $829 million. Meanwhile, BrightSphere Investment Group Inc.'s revenues were flat for the quarter, at $207.1 million.

Invesco Ltd., Atlanta, led the pack in revenue growth, up 18.5% quarter over quarter. The gains were primarily attributed to its acquisition of OppenheimerFunds, which closed May 24. That deal also brought Invesco's total assets under management to $1.2 trillion, a 25.5% increase.

Affiliated Managers Group Inc., which has 37% of its total AUM in alternatives, saw its revenue grow 9% during the quarter to $591.9 million. AMG's assets were down slightly, 0.3%, in the quarter to $772.2 billion as of June 30. Also, AllianceBernstein LP's revenue grew 7.8% to $857.8 million during the three months ended June 30, while the firm's total assets grew 4.7% to $580.8 billion.

Revenues during the first quarter were a different story, as all but five of the 19 traditional managers tracked by P&I reported a drop in revenue from the prior quarter.

Additionally, among traditional and alternative money managers alike, all but one of 25 firms that reported second-quarter earnings by Aug. 8, saw their assets under management increase during the second quarter — a continuation from the first quarter.

Most money managers that experienced a sharp decline in AUM and revenues in the fourth quarter, "recovered with the market's gains in the first half of the year," 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.

But favorable market conditions "can mask the industry's underlying problems," related to fee pressures and asset outflows, Mr. Hamner noted.

"The problem is you can't rely on rising equity prices forever, as the last week has shown us," Mr. Hamner said in an Aug. 6 interview. "Another correction or bear market would be a huge setback for the industry."

The S&P 500 index fell 3.31% between the market's close on July 31 and that of Aug. 6.

Amanda Walters, a New York-based senior manager at Casey Quirk, a practice of Deloitte Consulting LLP, said that second-quarter money manager earnings demonstrated a continuation of the recovery seen in the first quarter, but "even though assets are growing, fees continue to compress and costs are rising."

"Managers are trying to figure out, 'How do we position ourselves for future growth?'" Ms. Walters explained.

Among the 25 publicly traded money managers analyzed by P&I, 24 reported asset increases between 0.11% and 25.5% quarter over quarter.

AMG saw a slight decline in assets under management, down 0.3% to $772.2 billion as of June 30. At the firm, net outflows during the second quarter were $15.1 billion, compared with net outflows of $7.4 billion the previous quarter and net inflows of $4.3 billion in the second quarter of 2018.

Invesco's 25.5% hike in AUM as of June 30 was the outlier, due to the OppenheimerFunds acquisition.

The firm that saw the second-highest asset growth during the three months was alternative manager Blackstone Group Inc., which reported $545.5 billion in AUM, up 6.6% from March 31. Year over year, the firm's assets rose 24% — growth it attributed to $151 billion of inflows over the period and positive investment performance.

"This has been a remarkable period for Blackstone," Chairman and CEO Stephen A. Schwarzman said during a July 18 earnings call.

By product type, alternatives represented the largest share of global revenues among asset managers last year, a new report from Boston Consulting Group found. Alternatives strategies made up 45%, or $124 billion, of global asset manager revenues in 2018, and are predicted by 2023 to represent 48% of revenues, or $157 billion, according to the report, which was published July 31.

"Alternatives were the strongest asset class in 2018," the report said. "Although performance within the alternatives category varied from product to product — including negative returns for some (such as hedge funds) — the overall AUM for alternatives increased enough in 2018 to allow them to gain market share. We expect that strong performance to continue, with the result that alternatives will widen their lead as the largest source of the industry's revenue by 2023."

While alternatives are set to make up a growing share of the industry's assets in the future, "the short-term priority for many asset managers will be to restore the positive momentum that lapsed in 2018," the report said.

The report found that overall, the value of assets in the asset management industry fell by 4% globally in 2018, to $74.3 trillion from $77.3 trillion.

"This was the first significant year-over-year decline since the crisis year of 2008, and it reversed some of the benefit of 2017, when AUM increased by 12%," the report noted.

Overall, P&I's analysis of traditional and alternative money managers showed that most firms began to rebound from the down market at the start of 2019. In fact, all of the traditional money managers tracked by P&I experienced positive net asset growth in the first quarter compared with the fourth quarter of 2018.

This trend continued in the most recent three months, with managers gathering more assets.

Still, firms might face challenges to see significant growth, according to Charles Mulford, professor of accounting within Georgia Tech's Scheller College of Business and founding director of the college's Financial Reporting and Analysis Lab in Atlanta.

"It's all a matter of what goes on in the stock market from here," Mr. Mulford said.

"Given that equity prices are basically incorporating all good news, it's hard to see going forward how much higher they can go. It's going to be harder to get significant increases in assets under management from here," he said.