Asset managers remain under pressure despite a 0.7% increase in flows in the first quarter and 5.4% growth in assets, according to the latest quarterly survey from Moody’s Investors Service. The continued rally in equities underpinned the growth in assets.
Excluding BlackRock, the world’s biggest asset manager, flows declined 0.35% overall, but the pace of outflows slowed. Total advisory fees fell 2.1% versus the previous quarter due to lower performance fees, and base management fees rose just 1.8% sequentially.
“The surveyed group was unable to generate positive organic growth during the quarter despite strong markets, reflecting our concerns regarding industry headwinds for active asset managers,” said analyst Jordan Schoenberg in a statement.
(Related on ThinkAdvisor: Asset Managers Struggle With Outflows, Fee Compression)
The Moody’s survey covers a sample of 12 asset managers considered representative of the broader industry and accounting for about 10% of AUM for the U.S. industry. With the exception of BlackRock (BLK), they offer primarily actively managed funds — though Invesco (IVZ) has about 18% of assets invested in passive PowerShares funds — and all are publicly traded. Vanguard, the second largest asset manager and a mutual company owned by its investors, and therefore not publicly traded, is not included in the survey.
Moody’s maintains its negative outlook for the asset management industry, based on the movement of assets into low-fee passive products, fee pressures, regulatory developments constraining sales and high asset valuations and global macro divergencies, which increase risks.
“Drawdown risk related to high asset valuations has increased given the sustained market rally. That being said, the pace of outflows from active equity did slow during the quarter, and market appreciation continued to support the stability of earnings across the surveyed group,” said Schoenberg in the statement.
The report noted that due to the pending fiduciary rule, which begins to take effect June 9, “asset management companies have already taken steps to comply with the rule’s exemptions, if not for regulatory purposes, then to enhance the competitiveness of their investment products.” Moreover, according to the report, “it is unlikely asset managers will reverse recent strategic changes, even if the rule is repealed, particularly given the challenges posed by the proliferation of passive management.”
Flows increased for five of the 12 asset managers, but only one, BlackRock, saw flows rise more than 1%. Outflows among the seven other asset managers ranged between 0.04% of assets, from AllianceBernstein, to 4.21% of assets from Waddell & Reed.
The same pattern prevailed looking longer term, across five quarters beginning with the first quarter of 2016 and ending with the first quarter a year later. BlackRock led the five firms that experienced inflows, with flows rising 5.76%, and Waddell & Reed saw flows drop the most, down 28%.
Only one firm, BlackRock, had positive flows for all five quarters and two firms, Franklin Resources (BEN) and Waddell Reed (WDR) suffered outflows all five quarters.
Asset Flows For Publicly Traded Asset Managers
Note: Net long-term fund flows as a percentage of beginning of period AUM. Sources: Company reports, Moody’s Investors Service.
Among other highlights of the report:
- T. Rowe Price (TROW) saw advisory fees rise 13.8% year-over-year, supported by average AUM growth of 16.1%, after the firm cut management fees on many funds to be more competitive.
- Federated (FII), in contrast, reported a 7.5% decline in advisory fees for the first quarter, driven by institutional redemptions from money market funds and separate accounts.
- Legg Mason (LM) reported $3.9 billion in net flows for the quarter, the most since the first quarter of 2015, driven by inflows to affiliates Martin Currie and ClearBridge Investments, which was hired to manage a sleeve of Vanguard’s Explorer Fund.
- Janus saw $4.3 billion in net outflows in Q1, the most since fourth quarter of 2013, driven by “significant investment underperformance at INTECH, its mathematical equity subsidiary, which suffered $3.8 billion in outflows. The company recently completed its merger with Henderson Global Advisors to become Janus Henderson Group (JHG)
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BlackRock reorganized its active equity platform, reducing the number of traditional stock pickers and focusing instead on quantitative computer models, which it expects to save investors $30 million annually. The reorganization “signals a paradigm shift … away from higher-cost traditional stock pricing in an attempt to combat the competitive disadvantages of active management, namely weak investment performance and high fees.”
Schoenberg said BlackRock’s approach could become “pervasive” as other asset management firms adopt something similar to be more competitive with lower cost investment products in the future. But he noted that other managers are trying different approaches to retain and grow assets. AllianceBernstein (AB), for example, is “doubling down on active management with a concentrated specialized strategy,” said Schoenberg.
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