‘Unspectacular’ quarter for publicly traded firms

Fewer publicly traded money managers experienced growth in assets under management and revenue during the three-month period ended Sept. 30 compared with the previous quarter, Pensions & Investments' analysis of earnings reports showed.

Among the 24 managers that reported third-quarter earnings by Nov. 5, 17 experienced gains in total assets under management compared with 25 of 26 managers in the prior quarter.

Net flows in the third quarter were positive for 12 of the 24 managers and negative for 10 firms; data was not available for two firms. In contrast, second-quarter net flows were positive for 16 firms and negative for nine companies, with one firm not providing data.

"The third quarter was a capital markets story. Given the lack of organic growth for many firms, market returns are important to maintain assets under management. Managers get battered around during turbulent markets," said Tyler Cloherty, senior manager and head of the knowledge center for Casey Quirk, a practice of Deloitte Consulting LLP.

"The third quarter was fairly benign for publicly traded managers. The actual impact of quarter-over-quarter changes was small, resulting in a relatively unspectacular period for managers," said Mr. Cloherty, who is based in Darien, Conn.

Market returns did not come to the rescue of some managers with enough to buoy their AUM; the S&P 500 index was up 1.19% over the quarter, the Bloomberg Barclays Aggregate Bond index rose 2.27% and the MSCI All-Country World index fell 0.53%.

A big acquisition rather than market returns and high net inflows propelled Victory Capital Management Inc., Cleveland, to the top spot by AUM growth.

Victory Capital Management's AUM rose 127.6% to $145.8 billion in the quarter ended Sept. 30, primarily due to reporting for the first time the approximately $83.1 billion it gained through the acquisition of USAA Asset Management Co. on July 1.

Victory Capital reported 10.3% net AUM growth to $64.1 billion in the quarter ended June 30.

David Brown, the firm's chairman and CEO, said in the firm's Nov. 4 earnings release that partially due to the USAA acquisition, Victory Capital's "revenue and adjusted net income more than doubled sequentially, and adjusted EBITDA margin expanded to a record 44.8%."

Victory Capital reported net revenue of $215 million in the third quarter, up 135.2% from $91.4 million in the previous quarter and up 98.9% from third quarter of 2018.

Based on organic growth and investment returns, Goldman Sachs Group Inc., New York, experienced the largest increase in AUM in the third quarter, up 6.1% to $1.76 trillion and a 13.7% increase compared to a year earlier.

Net inflows to the firm's asset management unit totaled $69 billion in the third quarter vs. $17 billion in the second quarter.

Goldman Sachs' net inflows in the third quarter were topped by the $84.2 billion in net inflows for New York-based BlackRock Inc., which increased the firm's AUM 1.8% in the quarter and 8.1% for the year ended Sept. 30 to $6.96 trillion. BlackRock's net flows totaled $125.4 billion in the prior quarter.

Among the 24 publicly traded managers tracked by P&I, Boston-based BrightSphere Investment Group Inc. saw the largest decline in AUM in the third quarter, down 3.6% to $216.8 billion and down 8.8% from Sept. 30, 2018.

CEO Guang Yang said net outflows of $6.2 billion were "largely concentrated in lower-fee subadvisory accounts with about $2 billion related to Victory Capital's acquisition of USAA and the related reallocations, and another $2 billion related to continued reallocation from specific clients in the U.S. large-cap equities subadvisory space," a transcript of the firm's Nov. 5 earnings call showed.

Brett Perryman, BrightSphere's head of corporate communications, clarified in an email that "a BrightSphere affiliate had a subadvisory relationship with USAA (Asset Management). As part of its acquisition of USAA funds … Victory Capital Holdings moved management of USAA funds to its in-house managers. The decision was not related to performance."

Casey Quirk's Mr. Cloherty singled out alternative asset managers as one pocket of the investment management industry that continues to steadily attract assets under management regardless of market conditions.

"Alternative managers have been beneficiaries of asset owners rebalancing their portfolios into illiquid strategies," Mr. Cloherty said, adding that the intensity of fee pressure exerted on traditional managers by investors is generally not being applied to the same extent for private equity, real estate, private credit and other non-traditional managers.

Four of the five publicly traded alternative investment firms tracked by P&I experienced positive AUM growth in both the quarter and the year ended Sept. 30:

• Assets managed by Apollo Global Management LLC, New York, rose 3.5% in the quarter and 19.4% in the year to $322.7 billion.
• Blackstone Group Inc., New York, managed $554 billion as of Sept. 30, up 1.6% for the three-month period and up 21.3% for the year.
• Ares Management LP, Los Angeles, managed $144.3 billion as of Sept. 30, up 1.5% in the quarter and up 15.4% in the year.
• Assets managed by KKR & Co. Inc., New York, rose 1.3% and 7.1% in the quarter and year ended Sept. 30, respectively, to $208.4 billion.
• Assets managed by Carlyle Group LP, New York, fell by a slight 0.4% to $221.8 billion in the three months ended Sept. 30 but were up 4.6% for the year.

More traditional money managers also struggled to keep their revenue up in the third quarter than in the previous quarter.

Of the 19 traditional managers in P&I's universe of publicly traded firms, 12 produced revenue increases in the third quarter, six saw revenue decline from the prior quarter and one firm's revenue was flat. In the second quarter, 17 asset managers had positive revenue growth, revenue declined for one firm and one manager's revenue was flat compared to the previous three-month period.

Research by Cerulli Associates Inc., Boston, finds that fee pressure on traditional managers from both institutional and retail investors continues to squeeze profit margins, said Brendan Powers, associate director, product development.

In the institutional investor marketplace, Mr. Powers said increasing intermediation in manager selection by consultants and outsourced CIO providers is putting even more pressure on managers.

Invesco Ltd., Atlanta, like Victory Capital, also profited from an acquisition, namely of OppenheimerFunds in May 2019.

In its Oct. 23 earnings release, Invesco attributed increases in operating revenue of 19.5% in the third quarter and 28.2% in the year ended Sept. 30 to $1.7 billion to higher average AUM primarily due to the acquisition of OppenheimerFunds, which increased the firm's AUM by about $250 billion.

Invesco's assets under management as of Sept. 30 were down 1.1% in the third quarter to $1.18 trillion, but up 20.8% for the year.

Morgan Stanley Investment Management, New York, saw the largest net revenue decline among traditional managers, down 8.9% to $764 million in the quarter.