Mercer Capital's RIA Valuation Insights


2Q17 Call Reports: The More Things Change, the More They Stay the Same

Established trends from prior call reports continued into the second quarter of 2017.  Capital continues to flow into ETFs and other passive investment products at a rate such that AUM and revenues are increasing despite the ongoing struggle of actively managed products.  The trend towards fee-based compensation models continues as managers strive to maximize transparency and compete with passive products being offered at much lower rates. In addition, the DOL rule—having taken effect as of June 9—is set to start being enforced in January 2018. Resistance from members of the asset management industry, however, has some asset managers hoping for additional delays on the rule’s enforcement.

As we do every quarter, we take a look at some of the earnings commentary on pacemakers in asset management to gain further insight into the challenges and opportunities developing in the industry.

Theme 1: After a tough year for some asset managers in 2016, many firms are enjoying sustained net inflows quarter-over-quarter, with some experiencing record inflows and peak levels of AUM.

  • “Net inflows for the last 12 months totaled $336 billion as organic growth accelerated in the second quarter. Total quarterly flows exceeded $100 billion and were positive across client types, asset classes and investment styles…second quarter long-term net inflows of $94 billion were a record for BlackRock and represented an annualized organic growth rate of 7%.” – Gary Shedlin,
    BlackRock CFO and Senior Managing Director
  • “We ended the quarter with $33.5 billion in assets under management, the highest level of AUM in the firm’s history. Net flows have been positive, reflecting inflows from a range of existing clients and new relationships, and the lowest level of outflows we’ve experienced during the period since the global financial crisis.” – Richard Pzena, Pzena Investment Management Chairman and CEO
  • “Open-ended funds had record assets under management of $21.6 billion, an increase of $1.3 billion or 6% from last quarter and an annualized growth rate of 9%. And assets under management in closed-ended funds increased to $149 million or 2% from last quarter. This marks the 11th consecutive quarter of net inflows.” – Matthew Stadler, Cohen & Steers CFO and Executive Vice President
  • BlackRock saw “$86 billion of net inflows to iShares and index funds in the second quarter. Global iShares momentum continued with a record $74 billion of net inflows for a total of $138 billion in net inflows year-to-date.” – Larry Fink, BlackRock Chairman and CEO

Theme 2: The Department of Labor Fiduciary Rule officially took effect as of June 9, though the DOL has said it will not enforce the rule until after January 1, 2018.  Uncertainty regarding the rule remains, however, as there is growing support for a further delay of the rules enforcement until January 2019.

  • “I think, with the DOL, we’re in a comment period. It’s a little bit quiet right now.  People are drafting responses to both the SEC and the DOL.  Our sense is that the two now are talking and have been public in trying to work together.  So our view is that the January 1 date will be pushed back.  That’ll be the goal, I think, of most in the industry to try to give time to have a thoughtful overall standard developed with the two groups.  And you also have momentum on the legislative front to do away with it completely.  So I think that’s still a possibility. But I think the more probable is a delay and then the two groups working to come up with a workable standard.” – Greg Johnson, Franklin Resources Chairman and CEO

Theme 3: Industry players embrace investment in technology and explore the applications of ETFs not simply as passive investment products, but as investing tools used by active managers.

  • “The rapid growth we’re seeing in iShares and index funds is increasingly due to the fact that ETFs are no longer used only as a passive allocation, but by active investors to generate alpha in their portfolios. ETFs provide those investors targeting exposures without idiosyncratic risk of any one single stock or any one single bond.” – Larry Fink, BlackRock Chairman and CEO
  • “Long-term net inflows were driven by iShares, which continues to benefit from the rapid adoption of ETFs as asset allocation tools and financial instruments by professional money managers.” – Gary Shedlin, BlackRock CFO and Senior Managing Director
  • “Going forward, technology-enabled scale will be increasingly important for every aspect of an asset manager’s business, our client service, our asset generation and operational excellence. This year, we will be spending $1 billion on technology and data, and have over 3,500 employees working on technology and data-related roles.” – Larry Fink, BlackRock Chairman and CEO

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Our thanks to Christian Allen who drafted and did much of the research for this post in collaboration with our RIA Group.