The post-election rally in the stock market did little to stem the outflow of assets from active managers in the fourth quarter. According to the latest Moody’s Investors Service report on a dozen leading publicly traded asset managers, only BlackRock (BLK), best known for its passive iShares index funds, saw inflows in that quarter, and in each of the previous four.
BlackRock was also one of four asset managers that experienced growth in assets under management for the quarter; the others were Affiliated Managers Group (AMG), Federated Investors (FII) and Gamco Investors (GBL). Overall assets were unchanged from the previous quarter.
“The trend toward passive will continue,” said Moody’s analyst David Wang, noting that Moody’s expects assets of passive funds will overtake active funds, as Moody’s has reported previously.
“Regardless of what happens to the [Department of Labor] fiduciary rule, the industry is moving to fee-based advisory [and] lower cost funds,” said Dean Ungar, senior analyst at Moody’s.
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The report noted that “managers have already begun altering fund lineups and introducing new share classes to comply with the rule’s exemptions. Regardless of the outcome, it is unlikely managers will reverse changes that have already been made to enhance the competitiveness of their product lineups.”
The trend toward passive over more expensive active management pressured firms’ management fees. Base management fees, which exclude performance fees, fell 1.2% in the fourth quarter and were up just 1.1% for the year. BlackRock’s base management fee fell 2.4% in the fourth quarter despite almost $90 billion in net inflows.
Only two firms, AMG and Gamco, saw an increase in base management fees in the fourth quarter.
They were among the three firms, including AllianceBernstein, that saw an increase in EBITDA — earnings before interest, tax, depreciation and amortization — in the fourth quarter compared to the third. All three, plus BlackRock, also saw revenues rise in the fourth quarter.
Alliance was also buoyed by “very high performance fees,” said Ungar, adding that the investment portfolio gains in the quarter were not “necessarily sustainable. Inflows into its taxable fixed income products also offset outflows from stock portfolios. AMG and Gamco also benefited from higher performance fees, with Gamco’s tied to preferred securities issued by closed-end funds."
But performance fees are seasonal and generally highest in the fourth quarter, according to Moody’s. They provide some earnings stability but are not necessarily themselves sustainable.
The weakest firm highlighted in the Moody’s report was Waddell and Reed, an active manager that has suffered 10 consecutive quarters of net outflows, including $4.4 billion during the fourth quarter. Although corporate management reduced costs in the fourth quarter, Moody’s has downgraded the firm’s debt rating to Baa3, just above junk status, with a negative outlook.
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