Asset Managers: If You Are Not Growing - You Are Dying

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Includes: ALIZF, AMG, APO, AXAHF, BEN, BK, BLK, BX, CG, DB, EV, EWG, FII, FIS, GS, HYG, IVZ, JPM, OZM, PRU, SCHW, SPY, STT, TROW, XLF
by: The Fortune Teller
Summary

The world's top asset managers had a very rough month in October.

Negative double-digit returns for the month have doubled the negative total return for the year.

Asset managers are facing three main issues these days: AuM, Focus, and Pricing.

Going forward, they will need to increase popularity even if this comes on the expense of identity.

The world's top asset managers list is seeing many familiar faces, some are pure/predominant asset managers while others are either banks - e.g. JPMorgan (JPM), Goldman Sachs (GS), Deutsche Bank (DB) - or insurers, such as Allianz (OTCPK:ALIZF), Axa (OTCQX:AXAHF, OTCQX:AXAHF), and Prudential Financial (PRU).

Image result for asset manager aum ranking 2018

The four largest US asset managers - BlackRock (BLK), the Vanguard Group, State Street (STT), and Fidelity (FIS) are managing about $16T worth of assets. That's not too far off the US annual GDP!

Asset-manager stocks were down, on average, 10.5% in October, after being down over as much as 15% earlier this week (till and including 10/29/2018).

As poor as the performance over the past month was, asset-manager stocks have underperformed long before Red October came into play.

They are now down about 20.3% YTD, on average.

Asset Manager TR-October TR-YTD Market Cap
Blackstone Group LP (BX) -13.3% +8.7% 38.94B

Apollo Global Management LLC (APO)

-14.8% -8.1% 11.89B
The Carlyle Group LP (CG) -10.1% -8.3% 6.79B
BlackRock Inc (BLK) -12.7% -18.5% 66.14B
Charles Schwab Corp. (SCHW) -5.9% -9.4% 62.47B

Bank of New York Mellon Corp. (BK)

-6.6% -10.4% 46.80B
T. Rowe Price Group Inc. (TROW) -11.2% -5.9% 23.34B
Eaton Vance Corp. (EV) -13.6% -18.1% 5.34B
Franklin Resources Inc. (BEN) +0.3% -21.9% 15.83B
State Street Corporation (STT) -17.9% -28.6% 26.09B
Federated Investors Inc. (FII) +2.3% -29.5% 2.48B
Invesco Ltd. (IVZ) -5.1% -38.7% 8.93B
Affiliated Managers Group Inc. (AMG) -16.9% -44.3% 6.07B
Och-Ziff Capital Management Group LLC (OZM) -20.3% -50.5% 584.4M
Average -10.5% -20.3%

Asset managers stock performance YTD is -20.3% on average

With its October plunge, BlackRock is the main one to blame for the selloff we've witnessed in asset-manager stocks.

As we wrote earlier this month, it's Much More 'Black', Much Less 'Rock' for financials this year.

The industry index is heading for its biggest annual loss since 2008. Asset-manager stocks have performed much worse than their financials (XLF) counterparts as well as the broader market (SPY).

The commonly used mantra these days, explaining this slump, is "If you are not growing - you are dying."

Asset managers are dealing with three main-burning issues. To wit:

1. AUM Outflows

The volatility of flows in and out of iShares iBoxx $ High Yield Corp Bd ETF (HYG), BlackRock's $14.4B US high-yield bond ETF, has been tremendous and accelerating. This suggests that there is a lot of institutional involvement here and a great deal of disagreement as to market direction.

2. Shift of focus (Abandoning the traditional profit drivers)

A big takeaway from BlackRock's earnings is the increasing focus on their technology unit, where revenue increased 18%. CEO Larry Fink said he hopes this unit will produce 30% of the firm's revenue by 2022.

It speaks volumes that the biggest ETF issuer in the world (and the only company who is even close to Vanguard, flow-wise) is aggressively diversifying away from fund management businesses.

I'm wondering whether BlackRock is looking ahead to a new model of fund management in a zero-fee era where tech support/applications/trading platforms are the revenue drivers and fund management is the enticement/public?...

3. Fierce competition that drives fees (too?) much lower.

Last week, Prudential (PRU) has quietly launched the cheapest active equity ETF, priced at only 0.17%* per annum. Unless I'm mistaken, this is the cheapest active equity and fixed income ETF in the market.

*Indeed, Vanguard's factor and iShares evolved ETFs are cheaper, but they are traditional-active, not pure active

BlackRock Germany's (EWG) Chairman of the Supervisory Board, Friedrich Merz, who is now running to succeed Angela Merkel as head of the CDU party, says he intends to counter the rise of populism with an emphasis on national identity.

I guess that when it comes to BlackRock's AuM - it's the exact opposite... The firm needs to increase populism (towards its products) with no emphasis on national identity at all...

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Disclosure: I am/we are long JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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