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Cumulative assets under management of 18 publicly traded asset management firms increased by 2.4% in the third quarter, SS&C Technologies Holdings reported Wednesday.

Fifteen firms demonstrated sequential growth as cumulative assets rose to $12.96 trillion from $12.66 trillion in the second quarter.

Net flows were the proverbial fly in the ointment for the asset management industry during the third quarter, according to the report. After the composite group’s net flows in the second quarter declined for the first time in nine quarters, the outflows accelerated to $32.4 billion in the third quarter.

However, only 12 firms in the composite group experienced net outflows, compared with 14 firms in the previous quarter.

Strong market performance across all 17 firms that report flows and market performance offset the net outflows, the report said.

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“Ultimately it was solid market performance in Q3 that was able to more than compensate for an acceleration in net outflows for the composite group, resulting in a solid recovery in cumulative AUM,” Matthew Fronczke, director of strategic business consulting at SS&C Research, Analytics and Consulting, said in a statement.

“The big unknown is how capital markets will finish the fourth quarter, which have been turbulent so far.”

Since the first quarter of 2009, SS&C has performed consolidated financial statement analysis using the public quarterly earnings of the composite of 15 asset management firms. SS&C noted in a statement that it had added three recently public firms to the composite in the second quarter in order to be more comprehensive in its analysis.

Each quarter’s 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.

The 15 original firms in the composite are 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.

The three recently added ones are Diamond Hill Investment Group, Manning & Napier and Victory Capital.

Strong Macro Fundamentals

According to the report, the S&P 500 notched its biggest quarterly advance in nearly five years with a total return of 7.7% in the third quarter, which was largely attributable to a surge in quarterly profits in the April-to-June quarter.

Add to that U.S. GDP growth at an annual rate of 3.5% in the third quarter (initial estimate), following 4.2% growth in the previous quarter, according to the Bureau of Economic Analysis. In addition, global equity markets recovered after a disappointing second quarter, and the MSCI EAFE Index delivered a 1.4% return in the third quarter.

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In September, the U.S. Federal Reserve raised interest rates for the third time in 2018 — an event market watchers had been anticipated, the report noted.  With rising rates, U.S. and global fixed income markets underperform relative to equity markets.

The Bloomberg Barclays U.S. Aggregate Index was flat in the third quarter, while the Global Aggregate Index declined by 1.7%.

On balance, the report said, strong equity markets resulted in solid overall returns for most portfolios.

Q3 Performance Metrics

Overall operating expenses for the asset management industry rose by 0.7% in the last quarter, following two consecutive quarters of tight expense management. Changes (up or down) for compensation or distribution expenses varied on firm by firm.

The composite group’s operating margins fell by 23 basis points to 32.7% in the third quarter. They had been hovering around 33% for most of 2018, compared with the recent high of 34% in fourth quarter of 2017, and the all-time high of 35% in the 2015 second quarter.

Nine of the 18 firms in the composite group experienced improving operating margins on a sequential basis. The other nine firms saw their operating margins decline.

The composite group’s higher assets under management in the third quarter pushed asset-generated fee revenues up 0.3% sequentially, and overall revenues up 0.5% sequentially). This represented a turnaround after sequential declines during the first half of 2018.

The combined effect of 0.5% revenue growth was slightly offset by a 0.7% increase in expenses, moderating operating margins for the composite group as a whole by 30 basis points.

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