U.S.-Based Asset Managers: Results Improving With Equity Market Gains but We Remain Cautious

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we’ve noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

The market recovery during the first half of 2023, with the Morningstar US Market TR Index up 8.5% during the second quarter (and 16.5% on a year-to-date basis), helped lift the value of the assets managed by many firms in our coverage, although not as much as some might have expected. During the second quarter (first half of the year), the average gain in AUM for traditional asset managers we cover was only 2.2% (6.6%), as product mix (with equity funds accounting for half of asset manager AUM on average) and the continued underperformance of active equity funds relative to the market led to the group recording only a 2.8% (6.6%) market gain during the period(s). This, as well as flows into money market funds and currency gains, was offset by an average annualized decline in organic AUM growth of 2.9% (0.4%) during the second quarter (first half), which demonstrates the uphill battle many of the traditional U.S.-based asset managers face as they try to recover from last year’s market losses.