Moderate Outflows And Market Appreciation Drive Record AUM In The First Quarter While Operating Margins For Asset Managers Fall

After three consecutive quarters of sequential improvement, operating margins fell in the first quarter of 2017 by 200 basis points (compared to the fourth quarter of 2016) for the 15 publicly-traded asset management firms that comprise the DST kasina Asset Manager Composite¹.   In the same period, cumulative assets under management grew 3.8% quarter-over-quarter, and 4.8% year-over-year.  The AUM level of nearly $11 trillion ($10.999 trillion) represented an all-time high for the Composite group.

"The first quarter of 2017 was somewhat unique in that strong sequential growth in composite assets only led to modest sequential growth in asset management fee revenues, implying increased signs of fee pressure," said Erach Desai, Senior Research Analyst with DST kasina.  "With expenses already having been tightly managed for the past three quarters, the sequential rise in expenses pressured operating margins down in the first quarter – raising the specter of fee pressures starting to impact the historical 30%-34% range of operating margins for the composite group."

Key takeaways from the operating results for the public DST kasina Asset Manager Composite companies can be summarized as follows:

• Overall operating margins declined by 200 basis points from the fourth quarter 2016 level of 34.0% to 32.0%.
• 12 of the 15 asset management firms experienced a quarter-over-quarter decline in operating margin, compared to only nine of the 15 firms from the 3^rd to 4^th quarter of 2016.
• Excluding BlackRock², the Composite group still declined by 200 basis points. BlackRock's operating margin declined by 177 basis points, unable to buoy nor sink the overall Composite's weighted margins.
• Revenues from asset-generated fees in Q1 2017 of $8.4 billion, improved by 0.7% from the prior quarter. Curiously, BlackRock's asset-generated fees in the first quarter only improved by 0.3%; implying that the Composite group performed slightly better.

Unlike the fourth quarter of 2016, where equity and bond market performance diverged, the first quarter of 2017 was solid on both fronts.  U.S. equities advanced to fresh all-time highs, buoyed by positive economic data and sentiment associated with President Trump's plans to cut taxes and regulations. The S&P 500 index surged by 6.1% in the quarter.  Despite the anticipated 0.25% rate increase by the Federal Reserve, the bond market eked out a modest gain of 0.8% (based on the Bloomberg Barclays U.S. Aggregate Index).  This broad-based equity market strength also played out largely on the international stage, especially emerging markets.  The combination of these developments resulted in a sizable gains across various equity and fixed-income asset classes alike.

The first quarter performance for the DST kasina Asset Manager Composite companies improved meaningfully compared to the fourth quarter of 2016:

• Cumulative assets under management rose strongly by 3.8% quarter-over-quarter, and 4.8% year-over-year.
• The $10.999 trillion in AUM established a new peak level for the Composite group. Only two of the 15 asset management firms saw their overall AUM decline.
• Most of the AUM increase was attributable to market appreciation (91%).
• This was the 6^th consecutive quarter of positive appreciation and flows for the overall Composite group.
• However, this was the 7^th consecutive quarter of net outflows for the 13 asset management firms excluding BlackRock.
• The one consolation during the first quarter: Only seven of the 14³ firms that report net flows experienced a net outflow on a quarter-over-quarter basis, compared to 11 of the 14 firms in the fourth quarter.

Note: DST kasina's asset manager composite includes: BlackRock, Franklin Templeton, Invesco, Legg Mason, T. Rowe Price, Affiliated Managers Group, Alliance Bernstein (AB), Federated Investors, SEI, Janus Capital Group, Waddell & Reed, Artisan Partners, Cohen & Steers, GAMCO Investors, Pzena Investment Management

About DST kasina
DST kasina, LLC, helps leading companies in the financial services industry manage data, gain insight, and ignite change in their business. Through effective use of advanced analytics, research, and distribution intelligence technologies, DST kasina helps businesses to better understand, predict, and optimize key business factors impacting their asset growth and profitability. For more information on how to leverage DST kasina's strategic advisory services, visit www.kasina.com.

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 enable clients to transform complexity into strategic advantage by helping them continually 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 number of firms included in the DST kasina Composite dropped from 16 to 15 with Calamos Investments being taken private on February 21, 2017.  All historical references have been adjusted to exclude Calamos from the analysis.
² As BlackRock represents approximately 49% of the DST kasina Asset Manager Composite group's overall assets, we like to analyze some of the quarterly results by looking at the group excluding BlackRock.
³ SEI Investment is the only asset manager in our Composite that does not report new flows as an ongoing communications practice.

SOURCE DST kasina LLC

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