The fourth quarter of 2016 saw many major asset managers experience net outflows, a Moody’s report observes, while asset managers generated $529.8 million in performance fees, down 1.1% year over year, as passive investments continued to pressure active managers, reducing their fee income.

Moody’s goes negative on asset managers for a variety of reasons, including market tail risk

Moody’s 2017 outlook for global asset manager stocks is negative, Jordan Schoenberg and a team of US asset manager analysts stated.

The negative outlook is driven by the trend towards investors moving into passive products, pressure on fees, regulatory developments and increased compliance cost and a market environment where high stock prices and “global macro divergences” increase tail risk.

Despite the ever expanding stock market returns following the election of Donald Trump, major active managers failed to gain asset management ground. BlackRock was the only manager to report positive organic growth over the quarter as their assets under management were boosted by 0.6%.

Management fees were down 1.2% in the fourth quarter despite higher average assets under management, impacted by investor preference for lower fee products. BlackRock, for instance, witnessed increased asset inflows but suffered a 4.8% decline in fee rate revenue during the quarter versus a 2.1% decline across the group in Moody’s survey.

Currency moves did not help the asset managers. As the US dollar appreciated, particularly against the pound and euro, fees were pressured from offshore assets under management, as fees generated on non dollar-denominated assets tend to be higher than those on US dollar assets. The impact of dollar appreciation on reported base management fees was particularly notable for BlackRock and Affiliated Managers Group, as both managers have a significant presence in the United Kingdom, Moody’s noted.

Most active asset managers deal with fee compression

GAMCO bucked the trend, increasing total fees (including performance fees) by 12.9% year over year, with performance fees leading the growth from preferred securities issued by closed-end funds. GAMCO was rare, as more common was Franklin Resources, where base management fees were negative by 3.0% as quarterly net outflows totaled $14.0 billion.

As if highlighting the point, the growth was due to the fund manager’s passive products, as strong performance of its iShares equity and index fixed income products led the assets under management advance.

Long-term inflows were nearly $48.4 billion during the quarter, but that number is slightly positive. Take away BlackRock’s net inflows of $87.8 billion and the actual net inflows for the asset managers were actually significantly negative, at -$39.3 billion, losing -0.9% of assets under management on a quarter over quarter basis.

BlackRock has struggled to grow their active management arm. Active equity outflows were $4.5 billion in the fourth quarter and $20.2 billion over the course of 2016.

Waddell & Reed, initially credited with being involved in the “Flash Crash” of 2010, once again saw significant net outflows of $4.4 billion, marking the tenth consecutive quarter of withdrawals. On the month $3.0 billion of outflows came out of the firm’s Retail Unaffiliated Distribution channel and $1.5 billion of outflows from the company’s flagship Asset Strategy fund, the Moody’s report noted. Management continued to streamline operations and “adjust the company’s cost structure” to counter the declining revenue.

Long-term net flows at AllianceBernstein were flat during the fourth quarter, which Moody’s characterized as “a relatively strong result.” Modest outflows from the company’s equity products were mostly entirely offset by $2.6 billion of inflows into the firm’s core taxable fixed income, which have been performing well relative to benchmarks.

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