Source: SS&C analysis of company earnings reports.

Cumulative assets under management for a composite group of 15 publicly traded asset managers decreased by $10 billion in the first quarter, SS&C Technologies Holdings reported Wednesday.

Twelve of the 15 firms experienced a decline as cumulative assets fell from $12.578 trillion in the fourth quarter to $12.568 trillion. This was the composite group’s first quarterly market depreciation since the third quarter of 2015, according to the report.

Reduced assets under management resulted in lower asset-generated fee revenues, leading to lower operating margins.

On a positive note, the 26% net income recorded by the composite group was the best level in 16 quarters, as projected tax rates reflected the new corporate tax reform law.

“During the first quarter of 2018, operating margins for the public asset management firms declined from an all-time high achieved in the fourth quarter of 2017,” Michael Andrews, SS&C’s head of investment products research and consulting, said in a statement.

“While the globally synchronized “Goldilocks economy is likely not rolling over, market volatility — that came on with a vengeance during Q1 — sequentially drove down AUM, asset-generated fees and consequently impacted margins. While the asset management industry is still quite profitable, the lingering question going forward will be whether we have encountered a turning point in the trend line.”

SS&C performs consolidated financial statement analysis using the public quarterly earnings of the composite of 15 asset management firms. Analysis includes an adjustment to operating margins to account for one-time charges, but does not include adjustments for stock-based compensation and goodwill amortization as there are variances in reporting by individual asset management firms.

These firms were included in the research: Affiliated Managers Group, Alliance Bernstein, Artisan Partners, BlackRock, Cohen & Steers, Federated Investors, Franklin Templeton, Gamco, Invesco, Janus Henderson Group, Legg Mason, Pzena Investment Management, SEI, T. Rowe Price and Waddell & Reed.

Absent from the research was Vanguard, which is not publicly traded and had $5.1 trillion in AUM as of Jan. 31.

AUM Decline

SS&C noted that the first quarter started off with a continuation of strong economic momentum from the second half of 2017, coupled with stronger-than-expected fourth-quarter earnings. By February, however, equity prices had plummeted despite multi-decade-high business confidence because of concerns over inflation and increased market volatility.

By the end of March, fears of a global trade war had further destabilized financial markets with proposals for stiff tariffs on steel and aluminum products, sparking trade disputes with China.

“Macroeconomic growth and strong corporate earnings were unable to offset capital markets underperformance during the first quarter,” Erach Desai, senior business research analyst with SS&C, said in the statement.

“With secular challenges such as fee pressure and industry consolidation facing the asset management industry, it seems likely that many firms will face choppy waters as they navigate the remainder of 2018.”

Public asset management firms’ business processes were further complicated when financial reporting was affected by a new revenue recognition accounting principle, “Revenue from Contracts with Customers,” Topic 606, that went into effect in the first quarter of 2018.

SS&C said this accounting change meant that the historical, multi-quarter operating margin data points it had been tracking for the composite group were not comparable on an absolute basis, although the trend data — year-over-year and sequentially — remained comparable.

Q1 Performance Metrics

The report included key performance metrics for assets under management and asset flows for the composite group.

The three firms that managed a sequential gain in their assets under management from the fourth quarter were T. Rowe Price, BlackRock and Janus Henderson.

First-quarter net flows of $33.7 billion declined from higher levels in the previous three quarters. Thirteen firms in the composite group, excluding BlackRock, experienced net outflows of $23.2 billion, reversing the two-quarter trend of inflows.

SS&C explained why only 13 asset managers were included in the analysis of net flows. BlackRock accounted for 50.3% of the composite group’s overall assets (and 29% to 31% of revenues, depending on asset management fees vs. overall revenues). “Thus, it behooves us to continue to analyze some of the quarterly results by looking at the group excluding BlackRock.”

SS&C also noted that SEI does not report net flows as an ongoing communications practice as the other 14 firm in the composite group do. During the first quarter, consistent with recent trends, BlackRock represented nearly 83% of the positive flows for the composite group, and the top three firms accounted for more than 99.6% of the inflows.

Seven of the 14 firms that reported net flows experienced a net inflow quarter over quarter, while the remaining seven reported net outflows.

— Check out Bill Gross’ Slumping Fund Sees $580 Million of Outflows This Year on ThinkAdvisor.