STT State Street Corporation

By Justin Baer 

The shares of many publicly traded asset managers and banks with related businesses have tumbled in October as firms from BlackRock Inc. to State Street Corp. reported lackluster third-quarter results. Franklin Resources Ltd., parent of Franklin Templeton Investments, joined those firms Thursday in reporting quarterly revenue that fell short of Wall Street's expectations.

These declines represent an ominous signal that money managers are sending to their fellow investors, suggesting recent hiccups in the stock market could be early symptoms of a deeper ailment.

The broader market has also tumbled. Even with a bounce Thursday, the S&P 500 index has dropped over 7% in October, putting the benchmark on pace for one of its worst months since February 2009.

The asset management declines have been greater than the market's and have a common culprit: cautious clients. Some money-management shareholders worry that investor tolerance has shifted against the market. And these asset managers' performance will suffer if they cease to be buoyed by a market rally now closing in on its 10th anniversary.

"What's the incentive for people to buy stock in an asset manager?" said Loren Starr, finance chief at money manager Invesco Ltd. "It has a lot to do with your expectations -- or fears -- on the market going forward, and if we're going to see a further decline."

U.S. stocks rose Thursday, rebounding somewhat from a day-earlier selloff that had wiped out this year's gains in both the S&P 500 and Dow Jones Industrial Average. Those benchmarks are still down by more than 2% for the week.

Shares of BlackRock, the world's largest asset manager, and State Street, a custody bank that caters to investment firms, are each down nearly 20% in October, marking their biggest monthly declines in 10 and nine years, respectively. T. Rowe Price Group Inc. has fallen 14%.

"On the back of a nine-year bull run, we're starting to see investors take risk off the table," said Joseph Hooley, chairman and chief executive of State Street. "When investors do that, they move to lower-risk assets."

Such assets include cash and short-term bond funds. Notably, U.S. money-market funds had their biggest net inflow during the third quarter since the last three months of 2014, according to Morningstar.

This rotation is particularly bad for most asset managers and the custody banks charged with keeping those firms' books. Managers tend to charge higher fees on funds that focus on riskier assets, like emerging-market stocks. When investors push more of their money into safer -- and lower-cost -- investments, it cuts into the fees they pay managers.

BlackRock, Invesco, State Street, Bank of New York Mellon Corp. and Franklin were among the asset managers and custodians to post quarterly revenue that missed analysts' average estimates, according to S&P Global Market Intelligence.

That the current swoon for asset managers isn't limited to stock pickers and other so-called active funds hints at what might be in store for stocks. Those firms have been buoyed by the surging popularity of exchange-traded funds and other low-cost, index-linked investments.

But BlackRock, the top ETF seller, reported last week that client withdrawals in the third quarter had exceeded new money for the first time in three years.

"We're seeing more and more clients just pausing," BlackRock CEO Laurence Fink said in an interview.

The end of a market's bull run will lead to even harder days ahead for many asset managers, which derive their fees from the amount of assets they manage. When markets fall, the value of the assets -- and the amount of revenue they produce from fees -- declines, too.

"It's a tough thing for an asset manager when revenues are going down with the market and expenses just don't move as quickly," Mr. Starr said.

Lazard Ltd. reported a 4% decline in quarterly revenue from the investment bank's asset-management arm on Thursday. The division's assets under management had fallen by $10 billion, to about $230 billion, in less than three weeks since the start of October, said finance chief Evan Russo.

Some managers are preparing for worse, according to analysts.

When Invesco unveiled its $5.7 billion acquisition of rival OppenheimerFunds Inc. last week, the firm's executives said they expected to slash annual expenses by $475 million as a result of the deal. The figure seemed high to analysts, and several pressed Invesco investors on the matter during a conference call.

"To me, what they were saying was, 'We're going to use this as an opportunity to clean house'" before conditions worsen, said UBS Group AG analyst Brennan Hawken.

Mr. Starr said that wasn't the case, noting the number includes some cost cuts Oppenheimer had already planned to make before its deal with Invesco.

He said investment firms -- and the market itself -- may have hit a rough patch. But more volatile markets should make it easier for active managers to outperform major indexes -- and the passive funds that track them. If they do, they might win back some of the client money that defected to index funds and ETFs during the rally.

"The dynamic is negative in the short-term, but in the long term it has a positive, silver lining," said Mr. Starr, whose firm has both active and passive businesses. "It really does feel like a transition is setting up."

Write to Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

October 25, 2018 14:21 ET (18:21 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.