2Q18 Call Reports
After reaching record highs in late January, volatility in the equity markets picked up and has remained elevated through the second quarter. While volatile equity markets and normalizing monetary policy offer opportunity for asset managers, the industry continues to face fee pressure and increasing costs. At the same time, many asset managers are considering M&A as a means to gain distribution and operational leverage, reflecting the persistence of consolidation rationales in the industry.
As we do every quarter, we take a look at some of the earnings commentary of pacesetters in asset management to gain further insight into the challenges and opportunities developing in the industry.
Theme 1: Normalizing monetary policy and continued equity market volatility through the second quarter suggest opportunities for active managers.
- We continue to believe that the uptick in volatility and the gradual trend toward normalization of monetary policy on the part of global central banks will provide a more favorable backdrop for active management over time. – Philip Sanders, CEO & CIO, Waddell & Reed Financial, Inc.
- [A]t a time of change and transition in the debt markets, we’re especially proud of our positioning in fixed income in what is the largest asset class in the world … And I’m quite sure that [our fixed income managers] would tell you that they welcome higher rates and are confident in their ability to find wonderful investment opportunities in such an environment. – Joseph A. Sullivan, Chairman, CEO & President, Legg Mason, Inc.
- After a strong start to 2018, markets reversed mid-first quarter as escalating trade tensions, inflationary concerns and a flattening yield curve caused investors to pull back. Market uncertainty continued throughout the second quarter, reflecting ongoing global trade tensions, a slowdown in emerging markets, increased volatility and widening credit spreads. In the face of an uncertain and evolving investment landscape, clients have paused, deferring their investment decisions until they have greater clarity on the future. – Gary Shedlin, Senior MD & CFO, BlackRock, Inc.
- I think in a rising rate environment, a different kind of market, the value growth cycle, the 30-year spread of where we are of value versus growth, the strength of the dollar, all of these things can mitigate some of the pressures that we’re seeing on the current flows. So I think that, that’s – we don’t think that’s forever. – Gregory Johnson, Chairman & CEO, Franklin Resources, Inc.
Theme 2: Fee pressure, distribution leverage, an aging owner base, and increasing regulatory compliance costs continue to be key drivers of sector M&A.
- Our [M&A] approach is very attractive to our target universe, which is prospective Affiliates that are looking for a permanent institutional partner and I would underline the word permanent there. [A]t the highest level, we’re helping solve a demographically driven kind of management ownership and succession problem for these firms, and we have a solution that preserves and protects their unique entrepreneurial cultures across successive generations of management. That’s why that kind of permanent underline is so important … Now in terms of the current environment – absolutely, this has been an elevated period of M&A activity in the industry and you should assume alongside our proprietary calling effort, we’re looking at all of the opportunities in the market. – Nathaniel Dalton, President and Chief Executive Officer, Affiliated Managers Group, Inc.
- I think with the increase, the regulatory increase and the increase in expectations around due diligence, suitability and all of these things, it played – the distribution platforms just can’t do it. Nobody can do it. And so I think again these trends towards greater regulation, greater exposure, greater need to diligence managers and all that kind of stuff, greater suitability, all these things are driving towards doing business with fewer managers, larger managers, more diversified managers, and then what I said earlier in my remarks, managers that can also work with them to create vehicles and unique structures to serve what they’re trying to do for their clients in their region and then also potentially have the distribution support, the sales support, marketing support, all that kind of stuff to support the product and their salespeople, their bankers in the field. – Joseph A. Sullivan, Chairman, CEO & President, Legg Mason, Inc.
- [W]hen you look at capital, M&A is still the priority for the use of that capital on the balance sheet. And I think the challenges that you mentioned, and we all know, whether it’s fee pressure, passive or just the move to advisory from brokerage, will continue to put pressure on organic growth rates. So we are, as we said on past calls, very active in looking. – Gregory Eugene Johnson, Chairman & CEO, Franklin Resources, Inc.
- [W]e also believe that you do need scale to be competitive in this marketplace. If you asked me about the level of scale you needed 5 years ago, I would not have thought that was such a hugely important factor for success going forward. It is, because of the demands on money managers going forward, to do more than just manage money for clients and not just invest in investment capabilities, but also in operational capabilities, largely around technology. So scale becomes really an important factor as you look to success going forward, so you can make these investments all been talking about. – Martin L. Flanagan, President, CEO, & Director, Invesco, Ltd.
Theme 3: The industry is continuing to evolve in response to ongoing fee pressure.
- The way I think about it is in the core strategies, core fixed income, core equity, we’re no different than anybody else. There’s pressure within the industry on fee rates. That’s clear … We’re going to get some wins in core strategies, and they’re going to be at lower fee rates than they were 10 years ago or they were 5 years ago or they were 3 years ago. But we’re also winning business and we have the opportunity to win business in [alternative] strategies that we didn’t have 10 years ago or 5 years ago or 3 years ago that are in higher fee rate. – Joseph A. Sullivan, Chairman, CEO & President, Legg Mason, Inc.
- I generally think, consistent with the overall industry, as scale becomes more important and fees come under pressure … I think you’ll see an increase in the amount of support provided by the model of a multi-boutique as opposed to each individual boutique doing everything themselves because again, it’s generally always been a distraction and it’s always been a little bit expensive. But I think now, with some of the competitiveness and the fee pressures, it’s just makes more and more sense for that model … to provide support to grow the business, support to distribute the business and to do all those back office and operational things. – George R. Aylward, President, CEO & Director, Virtus Investment Partners, Inc.
- I don’t know that anybody has really true pricing power in this business. Obviously, the better performance, you have a little bit of flexibility. But at the end of the day … there are always going to be strong competitive products that have good performance. And if you don’t have competitive pricing structure, it’s going to be really tough to grow those assets. – Philip James Sanders, CEO, CIO, & Director, Waddell & Reed Financial, Inc.