DST Research finds Asset Managers' Operating Margins Match Record Levels with Surging AUM and Revenues

DST's Analysis Indicates Margins Crested in the Fourth Quarter 2017

NEW YORK, NY – FEBRUARY 22, 2018 – DST Systems, Inc. (NYSE: DST), a leading global strategic advisory, technology, and operations outsourcing company today released the results of its Asset Manager Composite for the fourth quarter of 2017.

DST's Research, Analytics, and Consulting analysis of 15 public-traded firms that comprise its Asset Manager Composite1 leads to three high-level takeaways:

  • Cumulative assets under management (AUM) went into over-drive growth of 18.1% year-over-year to a record of over $12.5 trillion, with 14 of the 15 asset management firms experiencing sequential growth in AUM. Notably, nearly 81% of the sequential change in AUM can be attributed to market appreciation.
  • Asset-generated fee revenues also experienced accelerating growth – up 14.0% year-over-year and up 4.1% sequentially – for the Composite group. Record fee revenues of $9.7 billion drove operating margins for the Composite to a record of 35.1% - last achieved during the second quarter of 2015.
  • Despite the record operating margin for the Composite group, the dynamics at the company level were quite mixed: eight of the 15 firms saw sequential improvement in operating margins, while seven of the 15 experienced a sequential decline. The three largest public asset management firms (BlackRock, T. Rowe Price, and Invesco) saw their operating margins drop modestly.

"Operating margins for the public asset management firms matched an all-time high of 35.1% for the fourth quarter of 2017, once again catalyzed by record revenues from asset-generated fees," said Michael Andrews, CFA, Head of Investment Products Research and Consulting at DST. "The globally synchronized "Goldilocks economy2" continued to drive record AUM, asset-generated fees, and thus margins. The intriguing question going forward is whether 2017 – overall – was indeed the peak of profitability for the asset management industry?"

Operating margins rose by 66 basis points in the fourth quarter of 2017 to 35.1% compared to the third quarter for the DST Composite group of companies. The operating margin for the Composite matched the record level achieved for the second quarter of 2015, as shown in the following graphic. Cumulative assets under management increased 4.2% quarter-over-quarter, and over 4.0% for all of 2017. The AUM level of $12.575 trillion represented the fourth consecutive quarterly all-time high for the Composite group.

Fourth Quarter Operating Metrics

Following is DST's analysis of the key fourth quarter operating metrics for the Composite group:

  • Operating margins for the Composite group – excluding BlackRock3 – rose 91 basis points and the 31.9% weighted operating margin for the 14 other asset managers was the best in nine quarters.
  • For the overall group, eight of the 15 firms saw improvement in operating margins, while seven of the 15 experienced a decline. The three largest public asset management firms (BlackRock, T. Rowe Price, and Invesco) saw their operating margins nudge lower sequentially.
  • Revenues from asset-generated fees for the Composite group of $9.73 billion (up 14.0% year-over-year, up 4.1%) represented the fourth consecutive quarterly all-time high. Excluding BlackRock, asset-generated fees for the 14 other asset managers were $6.834 billion (up 13.0% year-over-year, up 4.3%), also representing a fourth consecutive all-time high.
  • Operating expenses for the Composite group actually rose 4.1% from the third quarter, after being muted for much of 2017. Overall revenue growth of 5.1% for the group and finally a 4.1% uptick in expenses resulted in mixed operating margin trends for individual companies, as noted before.
  • Operating expenses for the 14 other asset managers (excluding BlackRock) did rise by 2.9%, after a surprising decline of 1.2% in the third quarter.
  • Conference call commentary suggests that most asset management firms do not have identified plans for spending the "tax dividend" for US corporate tax reform legislation that materialized in December 2017. Some firms announced the obvious – higher dividends and stepped-up stock buybacks – and, most others are contemplating the same. In general, however, there was limited discussion of more aggressive M&A activity, additional technology spending, or one-time bonuses for employees.

The fourth quarter of 2017 was a culmination of the broad-based capital markets and macroeconomic momentum that seemed to build throughout the calendar year.

  • In the US, fourth quarter Gross Domestic Product of 2.6% was below the 3.0+ levels experienced in the prior two quarters. However, the quarter wrapped up with the passage of a significant bill for corporate tax reform – the first meaningful fiscal policy development from a divided Congress.
  • US equities gained 6.6% in Q4 as measured by the broader S&P 500 Index, which closed out 2017 with an out-sized 21.8% gain. Despite a contentious political climate in Washington, expanding economic momentum and broad-based investor confidence seemed to prevail for capital markets results.
  • On the fixed income side, the Federal Reserve stayed on its charted course by raising the Federal funds rate by another 0.25% - capping out a year of three such rate hikes. Despite the rate increase, the US bond market eked out a 0.4% gain in the fourth quarter, as the yield curve continues to confound most experts.
  • Non-US equities gained 4.3% in the fourth quarter as measured by the MSCI EAFE Index: led by Japan, Asia, and emerging markets, while somewhat muted by a slight decline in Europe. For all of 2017, the MSIC EAFE Index saw a return of 25.0% - outpacing the S&P 500 – and contributing to the "Goldilocks going global" thesis.

The combined effect of the sizable gains – quantified above – resulted in continued market appreciation for the assets under management at most asset management firms. Key performance metrics for assets under management (AUM) and asset flows for the DST Composite companies were:

  • Cumulative assets under management (AUM) rose by 4.2% quarter-over-quarter and 18.1% year-over-year – remarkable year-over-year growth that has not been seen in over five years.
  • The $12.575 trillion in AUM established yet another peak level for the Composite group. Fourteen of the 15 public asset management firms saw their overall AUM increase sequentially.
  • While 80.8% of the AUM increase was attributable to market appreciation in the fourth quarter, net flows continued to improve in dollars for the third consecutive quarter.
  • Fourth quarter net flows of $115.8 billion improved from the $104.9 billion of in-flows in the third quarter. Excluding BlackRock, net flows of $12.9 billion improved from the $8.8 billion of inflows in the third quarter.
  • Excluding BlackRock, net flows remained positive for the 14 other4 asset management firms for the second consecutive quarter. However, consistent with recent trends, BlackRock represented nearly 81% of the positive flows for the Composite group during the fourth quarter. And, the top three firms accounted for more than 87% of the inflows.
  • This was the ninth 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, similar to the six of 14 firms experiencing such outflows in the third quarter (not all the same firms, however).

"The fourth quarter of 2017 put a bold exclamation point on what was a quarterly improving, record-breaking year for the asset management business across most metrics," said Erach Desai, senior business research analyst with DST Research, Analytics, and Consulting. "Nonetheless, we continue to see some divergence on fund flows between the "haves" and the "wanna haves." With rising interest rates and new-found volatility in the capital markets, it will be interesting to see if macroeconomic growth and a fiscal policy tailwind can enable the asset management industry to match what was achieved during 2017."

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.

Media Contact
Laura M. Parsons
DST Global Public Relations

1 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.

2 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 <em>The Goldilocks Economy: Keeping the Bears at Bay</em>.

3 In Q4 2017, BlackRock crossed over to account for 50.0% 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). Thus, it behooves us to continue to analyze some of the quarterly results by looking at the group excluding BlackRock.

4 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.

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