Strong Global Markets Help Asset Managers' Operating Margins Recover In The Second Quarter, But Industry Likely Continues To Face Fee Pressures, According To DST

Operating margins recovered modestly in the second quarter of 2017 by 57 basis points to 32.4% compared to the first quarter of 2017 for the 15 publicly-traded asset management firms that comprise the DST Research, Analytics and Consulting Asset Manager Composite^[1].  Cumulative assets under management grew 3.9% quarter-over-quarter, and surged 12.1% year-over-year. The AUM level of over $11.5 trillion ($11.562 trillion) represented another all-time high for the Composite group.

"From a long-term perspective, operating margins for the public asset management firms seem to be settling at the lower end of the 32% to 35% range in recent quarters, likely as a function of fee compression and the shift from active to passive," observed Matthew Fronczke, Head of Distribution and Product Consulting at DST Research, Analytics and Consulting. "Strong markets across most asset classes for several quarters continues to drive record AUM for the industry which, in turn, drives asset-generated fees higher and mitigates the secular pressures on the industry," continued Mr. Fronczke.

Key takeaways from the second quarter operating results for the public DST Research, Analytics and Consulting Asset Manager Composite companies:

• Overall operating margin of 32.4% modestly rose by 57 basis points from the first quarter 2017 level of 31.8%.
• Only three of the 15 asset management firms experienced a quarter-over-quarter decline in operating margin, compared to 12 of the 15 firms from the 4^th quarter of 2016 to the 1^st quarter of 2017.
• BlackRock's operating margin rose by 130 basis points, and thus buoyed the overall Composite's weighted margins. Excluding BlackRock^[2], the Composite group's operating margin improved by 32 basis points. BlackRock continues to stand out from the group because of sheer scale and the firm's strength in passives (iShares).
• Revenues from asset-generated fees in Q2 2017 of $9.0 billion, surged by 5.3% from the prior quarter, after four relatively flattish quarters. Excluding BlackRock, the Composite Group's asset-generated fees also grew strongly by 5.1% quarter-over-quarter. Clearly, this was an across-the-board recovery in fee revenues from the previous quarter.
• Operating expenses for the Composite Group rose only 4.0% sequentially from the prior quarter. The combination of strong sequential asset-generated fee growth (based on the broad-based market growth, which we discuss next) and operating expense management resulted in the net 57 basis point operating margin improvement.

On a broader market and macroeconomic level, the second quarter of 2017 built on the momentum experienced in the first quarter.  U.S. GDP in 2Q was initially tagged at 3.0% growth, an acceleration from the tepid 1.4% GDP level in 1Q.  U.S. equities gained 3.1% in 2Q, as measured by the S&P 500 Index.  While a moderation from the 6.1% surge in the S&P 500 Index in 1Q, the second quarter growth was driven by continued economic growth in the U.S. and improving global economic conditions somewhat offset by moderating enthusiasm for the likelihood of implementation of pro-growth policies from Washington, D.C.  The Bloomberg Barclays U.S. Aggregate Index, a broad measure of the bond markets, rose by 1.5% in 2Q (compared to growth of 0.8% in 1Q); again, despite the expected 0.25% rate increase by the Federal Reserve in June (the second rate hike in 2017).  Non-U.S. stocks led the global stock market rally in 2Q, again led by emerging markets, and both bolstered by a weaker dollar.  Not surprisingly, the combination of continued strength in equities and bonds resulted in sizable gains across a broad swath of asset classes on a global scale.

Based on this market and macroeconomic backdrop, the second quarter performance for assets under management (AUM) and asset flows for the DST Research, Analytics and Consulting Composite companies demonstrated continued strength along most metrics that were followed:

• Cumulative assets under management rose strongly by 3.9% quarter-over-quarter, and dramatically improved by 12.1% year-over-year.
• The $11.562 trillion in AUM established yet another peak level for the Composite group. Three of the 15 asset management firms saw their overall AUM decline sequentially.
• As was the case in the first quarter, nearly all of the AUM increase was attributable to market appreciation (83%) in the second quarter.
• Net flows of $90.1 billion improved from the $44.7 billion of in-flows in the first quarter. Excluding BlackRock, net out-flows of $13.5 billion was a moderation compared to the $19.9 billion in out-flows in the first quarter and the drastic levels for the second half of 2016.
• This was the 7^th consecutive quarter of positive appreciation and flows for the overall Composite group. However, this was the 8^th consecutive quarter of net outflows for the 13^[3] asset management firms excluding BlackRock. This continues to build on the trend of the "big getting bigger."
• Eight of the 14 firms that report net flows experienced a net outflow on a quarter-over-quarter basis, compared to 7 of the 14 firms experiencing such outflows in the first quarter.

"After operating margins for the composite group declined by 200 basis points in the first quarter of 2017 from the fourth quarter of 2016, the public asset management firms are likely breathing a collective sigh of relief," said Erach Desai, senior research analyst with DST Research, Analytics and Consulting.  Asset-generated fees rose 5.3% sequentially from the first quarter after four consecutive quarters of lack-luster quarter-over-quarter growth.  "Admittedly, the continued pressure on management fees has been offset by strong global asset markets and management teams collectively seem to be weathering "flowmaggedon"^[4] with a steady hand on the operating margin tiller," continued Mr. Desai.

DST Research, Analytics and Consulting Asset Manager Composite includes:  Affiliated Managers Group (AMG), Alliance Bernstein (AB), Artisan Partners (APAM), BlackRock (BLK), Cohen & Steers (CNS), Federated Investors (FII), Franklin Templeton (BEN), GAMCO (GBL), Invesco (IVZ), Janus Henderson Group (JHG), Legg Mason (LM), Pzena Investment Management (PZN), SEI (SEIC), T. Rowe Price (TROW) and Waddell & Reed (WDR).

About DST
DST Systems, Inc. (NYSE:  DST) is a leading provider of specialized technology, strategic advisory, and business operations outsourcing to the financial and healthcare industries. We enable clients to transform complexity into strategic advantage by helping them continually stay ahead of and capitalize on ever-changing customer, business and regulatory requirements in the world's most demanding industries. For more information, visit the DST website at www.dstsystems.com.

Media Contact:
Laura M. Parsons                                                                                
DST Global Public Relations 
+ 1 816 843 9087                   
[email protected]

^[1] The complete list of firms included in the DST Research, Analytics and Consulting Asset Manager Composite is provided at the end of this press release.  Second quarter 2017 results include the combination of Janus Capital and Henderson Group plc to form Janus Henderson Group.  All historical comparisons reflect the newly combined entity.

^[2] BlackRock now represents 49.2% of the DST Research, Analytics and Consulting Asset Manager Composite group's overall assets (while representing 26% to 30% of revenues, depending on asset-management fees and overall revenues).  Therefore, we like to analyze some of the quarterly results by looking at the group excluding BlackRock.

^[3] SEI Investment is the only asset manager in our Composite that does not report new flows as an ongoing communications practice. Thus, only 14 of the 15 asset managers in our Composite report net flows.  When BlackRock is excluded from the flows analysis, we are left with 13 firms.

^[4] First invoked by Russell Kinnel of Morningstar in an Investment Insight article circa April 2016.

SOURCE DST Systems, Inc.

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