BlackRock rebound heralds wider fund-sector recovery
Handful of first-quarter results lead to optimism but some managers will still struggle
If the world’s biggest investment company is a bellwether for the industry, then BlackRock’s first-quarter results this week suggest fund managers made a much-needed comeback after a torrid 2018.
The New York-listed group’s assets under management rebounded to $6.5tn after three months of healthy market returns and modest inflows. BlackRock said it was its strongest first quarter for four years, having seen more than $500bn wiped from its assets due to market moves in the previous three months.
Those losses were reversed as global equities rose 11 per cent and BlackRock attracted $65bn of inflows.
Last year was the worst for global asset managers since the financial crisis a decade ago. Listed groups saw their share prices fall 26 per cent on average as fund managers under long-term fee pressure were no longer protected by buoyant markets. Fund industry executives headed into 2019 hoping for a change of fortune.
A handful of first-quarter results indicate there is reason for moderate optimism.
A Wells Fargo analyst report on big US mutual fund managers found most started the new year on a firmer footing compared with the end of 2018 but long-term pressure on active managers was still evident.
“Organic growth in March weakened to 2.8 per cent from 3.5 per cent in February, but continued the recovery after heavy outflows in the highly tumultuous month of December,” the analysts wrote. They singled out BlackRock, T Rowe Price and Legg Mason as having hit the ground running in 2019. However, managers that had suffered in recent years, including Franklin Templeton and Invesco, were again hit by investor withdrawals, albeit at a lower rate than last year.
Active US mutual funds bled a net $258bn in the final three months of 2018, according to Morningstar. These same funds drew in $14.4bn in the beginning of 2019 — their largest quarterly haul since the start of 2015.
Rising markets have been good news not only for investment portfolios but also for shareholders in listed asset managers.
David McCann, an analyst at Numis Securities, said the average one-year forward price-to-earnings multiple — a measure of company value — for UK-listed managers had risen 15 per cent in the first three months of the year, from 13 times to 14.9 times. “This reflects share prices increasing by 7.4 per cent on average — likely following the UK market being up 8.4 per cent in that period — and one-year forward earnings on average being down 6.5 per cent,” he said.
But Chris Turner, an analyst at Berenberg, said British investment companies had not benefited as much as their international competitors.
“The market rose a lot in Q1 but for UK asset managers much of that was undone by foreign exchange moves,” he said. “A stronger sterling has been bad for UK managers and has taken away about half of the increase in the market, so it’s not quite as positive as you might think.”
He said flows had yet to recover with retail investors still waiting it out. The situation was worse with institutional investors, and he expected to see some large withdrawals announced. “The only exception is that demand for emerging markets products, particularly debt funds, has been huge. Ashmore’s short duration bond funds have done something crazy this month: something like £2.5bn in inflows,” he said.
Ashmore, the FTSE 250-listed group, reported strong quarterly results on Tuesday, with an 11.2 per cent rise in assets to $85.3bn. This was mostly due to $5bn of inflows, a tenfold increase on the intake for the previous three months.
Market watchers have predicted a strong year for emerging markets after a dovish turn by the US Federal Reserve. A continuation of low interest rates in the world’s largest economy will make higher yields offered elsewhere more attractive.
One company that has seen a mixed start to the year is Man Group, the $112bn UK-listed alternatives manager. Last week it reported that market returns had improved its assets by $4.5bn but it had suffered $700m of investor redemptions. The company said these outflows were concentrated in the discretionary long-only business, and included European retail investors cutting exposure to Japan and institutional investors reducing exposure to global equities.
“While we expect clients to continue adjusting their portfolio allocations during the second quarter, we see ongoing engagement with clients on new mandates and, in particular, continuing strong demand for our total return strategies,” said Luke Ellis, Man’s chief executive.
GAM, the crisis-hit Swiss fund group, had a better start to 2019. Having lost a third of its assets last year following it decision to suspend star manager Tim Haywood, GAM on Wednesday reported a 2 per cent fall in assets in the first three months of 2019, excluding Mr Haywood’s former funds.
Net outflows of SFr4bn were only partially offset by positive investment performance and foreign exchange movements of SFr3bn.
Managers at exchange traded funds have experienced a quieter than normal start to the year. Investors ploughed slightly less than $100bn into the products up to the end of March, a 28 per cent decrease on the same period last year, according to ETFGI, the data provider.
Some of the largest managers, including Lyxor of France and State Street Global Advisors of the US, suffered outflows, while the two industry leaders, BlackRock and Vanguard, saw falls in inflows, down 13 per cent and 19 per cent, respectively.
Numis classifies UK investment companies according to whether it believes they would do well or badly in a market downturn. Among its picks for weathering the storm are Schroders, River & Mercantile and Premier, while the companies it identifies as least resilient include Polar Capital, Liontrust and Intermediate Capital Group.
“Asset management is a high beta sector, therefore in the short term, most, if not all, companies are likely to sell off in the event of a significant market or macro downturn and this will probably be worse than the overall market average, as we saw in Q4 2018,” the analysts noted.
“However, we think that some companies are likely to operationally outperform the sector and therefore are worth considering, especially for a recovery trade.”