2016 Q1 Analyst Call Report

Our quarterly summary of analyst calls is as revealing as usual, as pacemakers in the asset management sector review this quarter’s performance and how it may shape the year ahead.

Investor sentiment in the first half of last quarter indicated a growing fear of another U.S. recession, as commodity prices continued to drop while initial jobless claims increased and global growth stalled.  By late March, however, commodity prices began to stabilize as central banks adopted easing plans to stimulate growth and the dollar eased against foreign currencies, on balance keeping equity prices relatively flat over the quarter despite interim volatility.  Overall, the market continues to experience a shift from growth to value stocks that has increased prices, depressed earnings, and further engendered the flight to passive strategies within the RIA industry.

Theme 1: A rocky start to the year has led to a modest pullback in the sector, despite a rebound in the second half of the quarter.

• “Weak and volatile markets for the first half of the quarter curtailed demand for return seeking assets. We felt this in particular in global high yield end equities” – Peter Kraus, AB
• “Despite a really difficult start to the year across most equity indices, despite a lot of volatility and a V-shaped recovery at the end of the quarter, we’re encouraged by the improvement in total company net flows, driven by ongoing strength across a number of different strategies.” - Richard Maccoy Weil, JNS
• “The first quarter of 2016 was defined by extreme volatility with large daily swings in asset prices and a sharp reversal in returns. S. equity markets begin the year on an extremely weak note with the S&P 500 posting its worst start in history. […] From this low, equities and commodities moved sharply higher over the remainder of the first quarter, resulting in most industries registering modestly positive returns for the period.” – Brian Casey, WHG
• “The unusual market volatility during the quarter created an environment that few active managers navigated successfully. Persistently slow growth, unusually accommodative global central banks, negative interest rates, and the uncertainty regarding the upcoming U.S. elections remain at the forefront of investor concerns.” – Philip James Sanders, WDR

Theme 2: Much like the U.S., the global market started the quarter on a sour note, only to rebound later in the quarter due to central bank easing across the board (from the ECB to the Bank of Japan), as well as growth within emerging markets.

• “Exchange rates continue to be a challenge for us in Europe, but have improved recently. In Asia, many of our global trading clients have reduced risks.  We’re only just beginning to see them come back into the emerging market asset class.” – Peter Kraus, AB
• “Turning to international business, we continue to see very strong growth. […] We’re winning business in Japan from both institutional and retail investors.” - Weil, JNS
• “Central bank policy makers were once again the major catalyst behind the market’s recovery. With the European Central Bank, Bank of Japan, and the People’s Bank of China providing additional stimulus, while the Federal Reserve did its part by once again delaying any additional rate hikes.  As we’ve seen with previous central bank driven rallies, low quality, high-data names were the top performers over the second half of the quarter.” – Brian Casey, WHG

Theme 3: The battle against active management is likely to continue, with firms trying to find ways to provide a balanced mix to customers while maintaining margins and differentiating from competitors.

• “I think that passive active battle is going to continue. I think investors have concluded so far that the way they experience active management in the last 20 years has been unproductive for them. […] We don’t think that’s rational, we don’t think it’s right, we understand why you are doing it,  [and] we don’t think that’s right, but the answer the industry has to have and that we are promoting is to have managers who, one, are very capacity constrained; and, two, are investing in high conviction ideas and have, as I say, marginally different portfolios” – Peter Kraus, AB
• “This was a very difficult quarter for all active managers. So it was difficult for us to make the progress we might have hoped for against our performance fees. […] The challenges on the U.S. side are somewhat related to investment performance. I think they’re somewhat related to what’s going on in the marketplace for the main client base; the pressure that is created when many of those clients are looking at barbelling their portfolio and going for a large portion of passive and then very active for the remainder.” –  Weil, JNS
• “In some ways, asset management companies are a little bit like ferryboats. You don’t want everybody running to the same rail at the same time because it causes the boat to rock a lot more than it otherwise would.  And having this diversification in terms of products and having this diversification in terms of clients moving in different directions at different times is very helpful for maintaining the overall stability of the franchise.” – Weil, JNS
• “As we look forward, we see investors at a crossroads from an asset allocation perspective. Many have been disappointed by their allocation with the hedge funds.  They are concerned over their fixed income valuations and are looking for where they can source returns to achieve their required rates of return.” - Brian Casey, WHG

Theme 4: As a result of the growing demand for passive products, ETFs are gaining ground in popularity and demand, thereby making them even cheaper.

• “With clients increasingly using ETFs, with the majority of U.S. retail fund flows going to ETFs, it’s imperative that we’re able to develop, launch, and successfully raise ETF assets. […] I think to be successful in the ETF space, I don’t think you can just have one or two offerings. I think you need to offer a few more than that, and we will. It’s hard to predict with great confidence exactly which ETF will be more successful.” – Weil, JNS
• “I turn to ETFs, which is a very small business for us and it’s still in the early stages. But in terms of new products and in efforts going forward, I think there’s a lot of time and effort being spent there, [and] that’s becoming increasingly a much more important part of the retail investors diversified portfolio, [and] we want to assist with that, so I think there’s a great opportunity there.” – George Aylward, VRTS
• “Last week, we filed a registration statement with the Securities and Exchange Commission to register three exchange-traded managed funds, or ETMFs. We continue to believe ETMFs are unique and progressive investment product options that in time will be adopted broadly in the marketplace.” – Thomas W. Butch, WDR