Q4 Call Reports

Triadic Effects of the New Tax Law

Current Events

Publicly traded asset managers were up nearly 13% last quarter, driven by tax reform and strong equity markets.  The Tax Cuts and Jobs Act has been especially beneficial to the RIA sector, as lower corporate tax rates have had a positive impact on equity markets, boosting AUM and earnings, which are now taxed at lower rates.  Many firms are still assessing the full impact of tax reform, but what is clear is that lower corporate tax rates in 2018 will give asset managers increased flexibility in capital management, M&A activity, and technology investment.  On the fee side, tailwinds for low-fee passive products remain strong, but recent strength in equity markets has shifted the asset mix for many firms towards higher-fee equity products, which may increase realized fees in the short term.

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: Recent corporate tax reform could spur M&A and other investing activity as firms have increased flexibility in capital management and strategic investment decisions.

  • We’re excited by the options created by corporate tax reform and are currently discussing how we can best serve all stakeholders.  These options include committing resources to further develop our financial technologies and investment data science expertise; obviously, M&A activity; investing to optimize our global distribution efforts; and introducing and seeding new products and services.  We also plan to make investments that directly benefit employees and the communities where they do business. – Greg Johnson, Chairman and CEO, Franklin Resources
  • I think the difference [post tax reform] is that everything’s fairly equal as we look at the world.  [I]n the past, if it was captive offshore cash, and before any tax reform, you may have had a bias to try to do something outside of the U.S.  I think, today, the U.S., it’s all fungible cash around the world.  So we would look openly to opportunities as much here in the U.S. as abroad.  I think that the net-net would be you have an opportunity to do a larger acquisition in the U.S. than you did in the past.  That would be the only real change, I think, as far as how we look at the M&A landscape.  – Greg Johnson, Chairman and CEO, Franklin Resources
  • Clearly, an increase in incremental cash flow from tax reform could impact likely favorably our capital management decisions, and that reflects both potential dividends and buybacks.  And our plan is to – I mean, given the tax reform is basically three weeks old – our plan is to effectively reassess our latest capital management recommendations probably around mid-year once we kind of finalize the impact the tax reform is going to have on BlackRock.  And there’s going to be lots of additional guidance that’s going to be forthcoming as well as making sure that we are looking at all of the balance sheet, if you will, opportunities that we have over the next several months, including more aggressively seeding and co-investing in new products. Gary Shedlin, CFO, BlackRock

Theme 2: Technology investment and acquisitions will continue to play a key role in expanding product breadth and enhancing client experience; BlackRock makes several FinTech acquisitions.

  • We accelerated the expansion of our technology portfolio during 2017 with the acquisition of Cachematrix and minority investments in iCapital and Scalable Capital.  Our investments in technology and data will enhance our ability to generate alpha and more efficiently serve clients, resulting in growth in both base fees and technology revenue. – Greg Shedlin, CFO, BlackRock
  • Technology is enabling more productive engagements with more financial advisers than ever before, driving accelerated asset and base fee growth across our platform.  BlackRock is using better data and technology to scale our own wealth advisory sales teams and equipping them with a better insight about our clients, about their portfolios, and giving a much better texture about markets. – Laurence Fink, CEO, BlackRock
  • In the area of technology, we expect approximately $1 million of additional run-rate costs in 2018 and an extra $4 million of onetime upfront expenses related to the implementation costs for risk management and regulatory initiatives, mostly to further support expanding degrees of investment freedom.  We also plan to implement a new client reporting system, which will enhance the client experience. – Charles Daley, CFO, Artisan Partners Asset Management

Theme 3: Tailwinds for passive products remain strong, and significant net inflows into low-fee passive products have continued in both the retail and institutional channels.  Despite ongoing fee pressure from passive products, some firms have seen modest fee increases due to market-driven shifts in AUM composition towards higher-fee equity products.

  • Global iShares generated a record $245 billion of new business for the year, representing full year organic growth of 19% with flows split nearly evenly between core and higher-fee noncore exposures.  Since BlackRock launched the iShares core funds 5 years ago, we have seen over $275 billion of net inflows, including $122 billion of net inflows in 2017 alone.  Three of the industry’s top five ETFs, in terms of net new assets globally this year, were iShares core ETFs; IBV, our S&P 500 Fund; IEFA for developed international market exposure; and IEMG, our core emerging markets fund. – Gary Shedlin, CFO, BlackRock
  • The rotation from active to passive has accelerated.  Risk-based asset allocations continue to gain popularity at the expense of the style box approach, and the demand for ETFs and other efficient investment vehicles has grown. – Eric Colson, CEO, Artisan Partners Asset Management
  • The fourth quarter open-end fund fee rate increased to 50 basis points from 48 in the prior quarter due to the impact of lower fund expense reimbursements as a result of the consolidation of service providers and an increase in average assets and higher fee equity products due to market appreciation. – Michael Angerthal, CEO, Virtus Investment Partners, Inc.