Q3 2018 Call Reports

Coping with Rising Volatility and Fee Pressure

Current Events

While equity market volatility was relatively subdued during the third quarter, 2018 as a whole has seen much higher volatility than last year.  This volatility may be an opportunity for active asset managers, although the industry continues to face fee pressures and increasing costs.  Scale is increasingly important for asset managers as assets flow into lower fee products due to secular trends in the industry and de-risking during recent periods of heightened volatility.

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:  Periods of heightened volatility may drive some client rebalancing, but there may also be opportunity for active managers. 

  • [W]hen I see this volatility, it’s actually a good thing because what it shows is the value of prudent fiduciary advice, which is what our partners are really focusing on.  So as I said in my remarks, in so many ways, I like the volatility. I think it’s a good thing.  And I don’t see some major impact in terms of our flows or if there’s one thing we learned in 2008, our client retention remained excellent.  And what really helped was ultimately the very prudent approach that our partners took towards the constructing their portfolios. – Rudy Adolf, Focus Financial Founder, CEO & Chairman
  • Asset and wealth managers are rethinking their business models and looking for ways to operate more efficiently and rigorously managing risk in more volatile market environments. – Laurence Douglas Fink, Blackrock Chairman & CEO
  • And I think the volatility is, as we said, is an opportunity for our investment teams as well as the business.  And we’ve seen some rebalancing occur, but the relationships and the long-term clients are very strong, and we think the business is positioned very strong, so we don’t see anything abnormal with regards to the rebalancing. – Eric Richard Colson, Artisan Partners Asset Management Chairman, President & CEO

Theme 2:  Scale is increasingly important in the industry as firms seek to gain distribution leverage and spread rising costs over a larger asset base.

  • [W]e’ve talked about the opportunity to potentially leverage our collective scale and find ways to be more efficient.  And we do see significant opportunities there.  As I mentioned, we have early days with respect to procurement, and Pete and his team are working on the common financial platform. And those will yield some real efficiencies for us.  And that will allow us to do three things – One will be to compete more effectively on price; secondly, to be able to invest more in our business as that’s being required and needed; and then thirdly, to potentially return more for shareholders. – Joseph A. Sullivan, Legg Mason Chairman, President & CEO
  • [I] think large acquisitions are very difficult.  There’s a lot of risk in them, I think, in just the brand and who you are as a firm.  But I think, again, if the right situation came up where you think you can take out a lot of costs and create value, we’re going to certainly look at that and be open to that. – Gregory Eugene Johnson, Franklin Resources Chairman & CEO
  • Increased size will enable us to continue to invest in areas that are critical to the long term success of our platform, such as technology, operations, client service and investment support, and to leverage those investments across a broader base of assets. – David Craig Brown, Victory Capital CEO & Chairman

Theme 3:  Asset flows continue to be impacted by secular trends towards low fee passive products and the recent heightened equity market volatility.

  • [W]e do see a continued move to passive, but we think the rate of that growth probably slows a little bit.  [W]e are believers in active management.  We believe that good, active managers do deliver alpha.  You got to prove it.  You got to earn your fees in that respect.  People are looking for differentiated, uncorrelated returns. – Joseph A. Sullivan, Legg Mason Chairman, President & CEO
  • The other area where you’re seeing, especially from the wires, which is starting to become a bigger driver of their business, and one of the reasons why we believe over the next five years, ETFs will double in size, is how more and more wires as they move more towards away from brokerage and more to a consultative relationship or advice, they’re using more models. And in the models are heavily populated by different BlackRock and iShares products. – Laurence Douglas Fink, Blackrock Chairman & CEO
  • While we saw a modest pickup in industry flows during the third quarter, primarily attributable to ETFs, we also saw accelerated derisking by many clients in an environment marked by continuing trade tensions, a further slowdown in emerging markets, and the steepening yield curve. – Gary Stephen Shedlin, Blackrock MD & CFO
  • We have seen fee pressure, which we’ve talked about on past calls.  When you get into the very large allocations, especially in the public funds or the sovereign wealth funds, and when you get to the sizeable mandates, there’s been a real shift in the market price of fees right now.  They’ve gone much lower than we’re willing to go. – Eric Richard Colson, Artisan Partners Asset Management Chairman, President & CEO