"Goldilocks" Economic Conditions Fuel Asset Managers' Record AUM

"Operating margins for the public asset management firms rose significantly sequentially to 34.2% for the third quarter of 2017, fueled by record revenues from asset-generated fees coupled with tightly managed expenses," said Michael Andrews, CFA, Head of Investment Products Research and Consulting at DST. "Synchronized global growth and market valuations – "Goldilocks"¹ going global – continue to drive record AUM for the industry, which in turn drives higher asset-generated fees, mitigating the secular pressures being faced by the industry."

DST highlighted three important takeaways from the third quarter operating results for the 15 public-traded firms that comprise its Asset Manager Composite²:

• Cumulative assets under management (AUM) accelerated by 13.2% year-over-year to a record of over $12 trillion, as all 15 asset management firms experienced sequential growth in AUM – the first time this has occurred in nearly two years.
• Asset-generated fee revenues grew 3.5% sequentially for the Composite group and achieved a new all-time high of $9.3 billion, driving operating margins higher. Operating expenses rose only 0.9% sequentially, suggesting that despite increases in revenues, asset management firms remain cautious about spending.
• Excluding BlackRock, net flows turned positive for the 14 other³ asset management firms for the first time in nine quarters. On the flip side, for the third quarter of 2017 BlackRock represented more than 81% of the positive flows for the Composite group, and the top three firms accounted for more than 91% of the inflows.

Operating margins rose by 182 basis points in the third quarter of 2017 to 34.2% compared to the second quarter of 2017 for the DST Composite group of companies. Cumulative assets under management increased 4.4% quarter-over-quarter, and 13.2% year-over-year. The AUM level of $12.072 trillion represented the third consecutive quarterly all-time high for the Composite group.

Following is our analysis of the key third quarter operating metrics for the Composite group:

• Overall operating margin of 34.2% was the best level achieved in the past eight quarters (since Q2 2015).
• Only four of the 15 asset management firms experienced a quarter-over-quarter decline in operating margin, compared to three of the 15 firms for the second quarter of 2017.
• Operating margins for the Composite group – excluding BlackRock⁴ – rose 180 basis points sequentially, and the 30.7% weighted operating margin for the 14 other asset managers was the best in three quarters.
• The third quarter represented the widest gap in operating margin (349 basis points) between that of the Composite group vs. that of the 14 other asset managers (excluding BlackRock).
• Revenues from asset-generated fees for the Composite group of $9.346 billion (up 8.3% year-over-year, up 3.5% sequentially) represented the third consecutive quarterly all-time high. Excluding BlackRock, asset-generated fees for the 14 other asset managers were $6.544 billion (up 7.7% year-over-year, up 3.1% sequentially), representing an all-time high.
• Operating expenses for the Composite group rose only 0.9% sequentially from the second quarter. Thus, the combination of strong sequential growth in asset-generated fees and continued expense management resulted in the 182 basis point improvement in margins.
• Operating expenses for the 14 other asset managers (excluding BlackRock) declined sequentially by 0.8%. Despite strong revenues, firms appear to remain cautious on spending.

On a broader market and macroeconomic level, the third quarter of 2017 built on the momentum experienced in the first half of 2017. Third quarter U.S. Gross Domestic Product of 3.3% represents the best quarterly U.S. GDP in three years, and accelerated from the 3.0% growth notched in Q2. U.S. equities gained 3.96% in Q3, as measured by the S&P 500 Index.  The equity market momentum continued in the third quarter due to expanding economic growth and despite natural disasters and the political climate in Washington. The Bloomberg Barclays U.S. Aggregate Index, a broad measure of the bond markets, rose by 0.85% in Q3, compared to an increase of 1.5% in Q2, even as the Federal Reserve initiated its plan to reduce its balance sheet.  Non-U.S. stocks continued to lead the global stock market rally in Q3, again led by emerging markets China, Brazil and Russia. For the third consecutive quarter, the combination of continued strength in equities and bonds resulted in sizable gains across a broad swath of asset classes on a global scale.

Based on this capital markets momentum fueled by synchronized global economic growth, the third quarter performance for assets under management (AUM) and asset flows for the DST Composite companies showed continued strength along most metrics that we follow:

• Cumulative assets under management (AUM) rose by 4.4% quarter-over-quarter and 13.2% year-over-year.
• The $12.072 trillion in AUM established yet another peak level for the Composite group. All 15 asset management firms saw their overall AUM increase sequentially for the first time since Q4 2015.
• While 81.5% of the AUM increase was attributable to market appreciation in the third quarter, net flows continued to improve contribution.
• Net flows of $105.9 billion improved from the $90.1 billion of in-flows in the second quarter. Excluding BlackRock, net flows reversed course to an in-flow of $9.8 billion compared to outflows of $13.5 billion in the second quarter. This was the first time in nine quarters for net flows to turn positive for the 14 other asset management firms.
• This was the 8th consecutive quarter of positive appreciation and flows for the overall Composite group.
• Only six of the 14 firms that report net flows experienced a net out-flow on a quarter-over-quarter basis, compared to eight of the 14 firms experiencing such outflows in the second quarter.

"The third quarter of 2017 was remarkably strong across almost all metrics," said Erach Desai, senior research analyst with DST Research, Analytics and Consulting. "Despite this strength, the data on flows continue to illustrate a proverbial tale of two cities: the top three firms accounted for more than 91% of overall inflows, and six of the 14 public asset management firms continued to see outflows even in this global Goldilocks macroeconomic backdrop."

DST Research, Analytics and Consulting Asset Manager Composite includes:  Affiliated Managers Group (AMG), Alliance Bernstein (AB), Artisan Partners (APAM), BlackRock (BLK), Cohen & Steers (CNS), Federated Investors (FII), Franklin Templeton (BEN), GAMCO (GBL), Invesco (IVZ), Janus Henderson Group (JHG), Legg Mason (LM), Pzena Investment Management (PZN), SEI (SEIC), T. Rowe Price (TROW) and Waddell & Reed (WDR).

About DST
DST Systems, Inc. (NYSE: DST) is a leading provider of specialized technology, strategic advisory, and business operations outsourcing to the financial and healthcare industries. We assist clients in transforming complexity into strategic advantage by providing tools and services to help them stay ahead of and capitalize on ever-changing customer, business and regulatory requirements in the world's most demanding industries. For more information, visit the DST website at www.dstsystems.com.

Media Contact:
Laura M. Parsons                                                                                
DST Global Public Relations    
+ 1 816 843 9087                   
[email protected]

¹ The term "Goldilocks Economy" may have been coined by David Shulman, senior economist at the UCLA Anderson Forecast, who wrote an article in 1992 titled The Goldilocks Economy:  Keeping the Bears at Bay.
² The complete list of 15 firms included in the DST Research, Analytics and Consulting Asset Manager Composite is provided at the end of this press release.
³ SEI Investment is the only asset manager in our Composite that does not report net flows as an ongoing communications practice. Thus, only 14 of the 15 asset managers in our Composite report net flows.
⁴ BlackRock now represents 49.5% of the DST Research, Analytics, and Consulting Asset Manager Composite group's overall assets (while representing 28% to 30% of revenues, depending on asset-management fees and overall revenues).  Therefore, it behooves us to analyze some of the quarterly results by looking at the group excluding BlackRock.

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SOURCE DST Systems, Inc.

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