A review of fourth quarter earnings for publicly traded asset managers shows lackluster organic growth - but also some bright spots.
According to Rob Lee, asset management analyst at Keefe, Bruyette & Woods, revenues and earnings for these managers rose on the back of robust markets that raised the value of assets under management. Still, actively managed U.S. equity strategies continued to suffer from a lack of demand, dragging on asset managers overall.
In KBW's latest report, "Asset Managers 4Q Review & Trend Analysis: Markets Lift Most Boats," Lee writes that there were some tail winds for the industry during the quarter, including flows into BlackRock's exchange-traded funds and demand from non-U.S. investors, which pushed up results for AllianceBernstein, BlackRock, Legg Mason, and Invesco. Investors continued to pull money from Artisan Partners Asset Management, Cohen & Steers, and Waddell & Reed Financial.
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Organic growth stayed negative last quarter, declining 0.5 percent. It fell by 1.4 percent for the third quarter of 2017 and declined by 1.1 percent for the fourth quarter of 2016.
Still, assets under management increased in value, pushing up revenue and earnings. Assets on average increased 3.6 percent from the third quarter, and earnings per share for the median asset manager rose 4.3 percent. Compared with last year, the median increase in management fees was 14.3 percent, in part because of the growth of higher-fee global products. Lee doesn't expect higher fees to persist, however.
"The long-term downward shift in fee rates reflects a mix of factors, including an asset mix shift toward fixed income, institutional, and other lower-fee strategies such as passive products," he wrote in the report.
Despite increased earnings, stock performance for these asset managers has been fairly weak, as volatility has shaken markets and investors' concerns about the prospects for the asset management industry as a whole have risen. Lee says investors are penalizing asset managers in particular that they think have complex structures, including Affiliated Managers Group, AllianceBernstein, and OM Asset Management.
There's more reason to be optimistic about alternative investment managers based on fourth-quarter results, the analyst says. Lee writes in a separate report that both investment performance and fund raising are healthy for alternative investment managers, including Blackstone Group, Carlyle Group, and KKR. At the same time, many of these managers are raising money in a variety of funds, giving them a diverse source of new capital. Inflows into credit funds are particularly strong, he writes.
Firms such as Apollo and others also have significant amounts of so-called dry powder, money that has not yet been invested and isn't yet earning fees. That money will be a source of future revenue and growth, as these firms start charging fees on it as they make investments, Lee notes.
"While high asset values have made capital deployment tougher, we expect overall deployment to remain at healthy levels," writes Lee.