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Asset Managers Are Big Beneficiaries of the Corporate Tax Cut: Moody’s

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The new tax law is a boon for asset managers and it’s already having a positive impact on fourth-quarter results, according to a new report from Moody’s Investor Services.

The median effective tax rate for 14 publicly traded asset managers included in the report has fallen from 30% to 24.3%, and companies have already revalued their deferred tax assets and lower liabilities to reflect their lower tax rates, the report notes.

Federated Investors, Cohen & Steers and Virtus Investment Partners saw the biggest decline in their tax rates more than 9 percentage points while OM Asset Management, Gamco Investors and T. Rowe Price saw the smallest drop, between 0.4 and 2.1 percentage points, and Legg Mason saw a slight increase, up 1.3 percentage points.

Overall corporate tax cuts represent a “significant savings for asset managers, giving them greater flexibility to carry out their capital management,” according to Moody’s. They also have “positive credit implications for the [asset management] sector” because investors will have more money to invest, increasing the demand for their products and services, the report notes.

That could help net inflows, which have been a weak spot for asset managers, according to Moody’s. Excluding BlackRock, flows fell 0.81%, between the fourth quarters of 2016 and 2017. Including BlackRock, they rose almost 4%.

BlackRock was the only asset manager with positive net inflows for the five quarters between December 2016 and December 2017, with flows up almost 9%. Waddell & Reed was the only firm to experience outflows during all five quarters, totaling almost 18%.

Of the 12 other asset managers included in the report most of them with primarily actively managed funds six saw positive flows during those five quarters; eight had negative flows.

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The sluggish flows will “not be a bulwark against a down market,” says Dean Ungar, senior analyst at Moody’s. “Now the market is good due to a strong economy, but there’s uncertainty due to potential trade policy changes and the high valuation of the market.”

The strong stock market has been driving asset growth, revenues and EBITDA for these money managers. Assets grew 17% on average compared to a year ago and 4% between the third and fourth quarters.

Fees, however, fell, but only slightly, down less than one basis point to 33.6 basis points. The downward pressure on fees due to the growth in passive products was offset by a better mix of products offered by active managers, according to Moody’s.

It expects more acquisitions of ETF sponsors by predominantly active asset managers a “strategy to adapt to the passive revolution.” In the fourth quarter of 2017, Invesco announced its acquisition of Guggenheim Investments, which has 79 ETFs, and WisdomTree Investments announced its acquisition of several channels of ETF Securities’ European businesses.