SLAM Wars: The Flow Awakens Ranking Asset-Manager Flows & Profits

Also missing in action are Goldman Sachs, Deutsche, Northern Trust, PIMCO, and other big and worthy asset managers.  What's up with that?

The short explanation: these firms, for various reasons, don't give us the data we need to do the analysis we want to do.

We'll dilate on one point: "asset management" and "wealth management" aren't the same thing.  They're related and sometimes yoked together in the same line of business, and that's understandable since they're "synergistic," as the consultants would say.

Unfortunately (for us), wealth management includes revenues which aren't asset-management fees and have no direct relationship to AUM.  So, mingling WM with AM revenue tends to screw up the AUM-based ratios we want to calculate.  We've tried to avoid that.

We're talking about interest on loans to ultra-wealthy individuals.

You may be saying: these people already have all the money, why would they need to borrow more?

But a UHNW person can run short like anyone else.  It's not easy to raise cash in a hurry on a Mark Rothko or a Gulfstream G650, or a private island.  But a concierge-like WM officer can make those things happen.  They know exactly what your collateral is (some of it is on their books as AUM) and they get it done.

UHNWs like that kind of service.  We were amazed when we checked into it to see how much some of the WM groups make on those credit lines.

Also: six of our 37 are actually lines of business within larger firms, but the parent company in each case kindly discloses enough information to let us carve out and analyze their AM unit.

State Street Global Advisors, for instance, is a line of business within State Street Corporation. SSGA manages a lot of money but the parent (STT) is primarily a custody bank, and earns most of its income in its "investment servicing" unit doing boring but essential back-office things like custody, accounting, fund administration, etc.

But the boring custody business gave them about 92 percent of their $2.4 billion pre-tax income last year.  SSGA, managing all of that $2.2 trillion AUM, provided only $0.2 billion pre-tax.  We think that relatively small contribution to the corporate bottom line is partly due to performance issues within SSGA, as we'll see in due course.

Other AM sub-businesses on our list make a proportionately much bigger contribution to the parent's profits.  It turns out asset management can be a very profitable business when you do it right.

Turnovers: CEOs hired, fired, or expired in (or near) 2015:

Here's a brief survey of recent CEO turnover in the SLAM37:

Some of these moves are probably related to firm performance.  Others are benign.

01 Ronald P. O'Hanley succeeded Scott Powers as CEO and president of State Street Global Advisors in March, 2015.  Mr. O'Hanley was hired away from Fidelity Investments where he had been VP of Asset Management.  As subsequent charts will show, SSGA had a rough year.

02 Curtis Y. Arledge made it through 2015 as CEO of BNY Mellon's asset manager group, but then departed in February.  As with Mr. Powers, his leaving appears to have been involuntary.  He has been succeeded by Mitchell Harris.  This was an internal promotion, Mr. Harris having been the number-two executive in the unit as President of BNYMIM.

Like SSGA, BNYM has had performance hiccups, which we will look at.

03 Jay Wintrob was hired as Oaktree's first CEO in October, 2014.  The founding partners concluded that the business had gotten sufficiently big and complex to justify a full-bore chief executive so that they could focus on the deal-making.  He was previously CEO of AIG's Life and Retirement unit and was thought to be a contender for the top job.  But he didn't get it, and chose to retire.  He was already serving as an outside board member of Oaktree and the Oaktree partners scooped him up.

04 John P. Calamos Sr, the 73-year-old patriarch and CEO of the eponymous Calamos Asset Management in Chicago, stepped down as CEO last month, while remaining chairman and co-chief global investment officer.  Calamos had a not-great year as we shall see below.  He hired a fellow Greek-American, John Koudounis as his successor.

Mr. Koudounis left a good job at Mizuho Financial Group in New York to return to his native Chicago.  The inducements were substantial.  He will earn a base of $800 K plus a minimum annual bonus of $2.6 million.  Plus, annual long-term incentive awards of $1.6 million.  Plus, a one-time signing bonus of $1.25 million.

Calamos has also had AUM flow problems, as our all-seeing charts reveal.

05 Jeff Maggioncalda turned over the CEO keys to a carefully-groomed successor at Financial Engines.  Lawrence Raffone stepped up from President to the top job in January, 2015.

FNGN is doing quite well and Mr. Maggioncalda, who became the startup's first employee and CEO at age 27, will undoubtedly be popping up in a top job elsewhere in the near future.  Meanwhile, he's learning to play the piano.

Next.

Chart #2: FUND FLOWS, the rise and fall in AUM for FY 2015.

Here's where we judge firms on execution of the First Commandment: Thou shalt gather AUM.

SLAM37 Customer Flow as a Percent of Beginning AUM, FY2015

This chart looks complicated, but really isn't.

From left to right we have beginning and ending AUM for FY2015.

The difference is gross annual change in AUM.  Then the two components of that change are broken out: customer flow, and market/other change.

Finally, we divide customer flow by beginning AUM.  That number tells us how big flow was relative to the size of the firm.

Net flow is, of course, new investments coming in, less redemptions going out.

"Market/other" is mostly just the rise or fall of market prices of assets in the period.  But it also includes other items such as foreign-exchange adjustments, adding or reducing leverage, or acquiring other firms.  Those other factors can be very significant for some firms in some periods.

Who's got the flow?

BlackRock had by far the biggest net flow measured in dollars: $150 billion.  But as a percentage of AUM it was only ranked 14th, with 3.2 percent.  Good, but not great.

Mr. Fink said in 2014 that he expected to grow his already-huge AUM at 5 percent a year going forward.  But the actual growth rate has been significantly lower and the BlackRockers later said that the number was "aspirational."

At the top by a mile is WisdomTree, the ETF shop which grew their AUM at a blistering 43 percent year-over-year.

The smallest firm on our list, Hennessey Advisors also had an excellent flow growth: they're ranked 6th with 11.6 percent year to year flow.

And the innovative Financial Engines, which doesn't like to be called a robo-advisor, is doing very well, ranked 5th with a $12.3 billion inflow.  A lot of that is new money, but they're also working hard at converting "under advisement" dollars to "under management" dollars, which earns them better fees.

Late in the year they bought The Mutual Fund Store, a big, country-wide RIA firm with $10 billion of customer money.  That won't count as customer flow in our charts, and in any case most of it is "under advisement" money.  But it's a significant extension of its mostly-online platform, adding lots of offices for face-to-face counseling for those who want it.

The median flow rate on our list is about 0.5 percent, and the overall weighted-average flow rate is about 0.2 percent.  Those stats suggest that there must be some big negative flow on the bottom half of the chart, pulling down the average, and it's easy to spot: State Street had a negative customer flow of $150 billion.  That's a negative 6.2 percent on AUM, ranking them 33rd out of 37.  Not good.

Another of the mega-managers on our list, BNY Mellon, also had significant outflows.  Their negative 2.1 percent on AUM ranked them 26th out of 37.  As noted, there has been a CEO turnover.

The much smaller Calamos, primarily an active-equity manager, also had a relatively big net outflow, a negative 4.3 percent on AUM.  Mr. Calamos, Sr is still chairman and chief investment officer, but he's hired a new CEO.

The big publicly listed private-equity firms on our list were mostly in asset-gathering mode: Ares, Apollo, Blackstone and KKR were all in the top 10, while Fortress had slightly negative flows.

This would be a good place to note that the private-equity players operate on a different rhythm from most other asset managers.  Over the long haul, of course, they would like to have more rather than less AUM, if only because it pays them a steady 2 percent in management fees.

But annual net flows don't necessarily signify much about their long-term profitability.  An inflow (money raised from limited partners) has to be put to work, and good deals may not materialize as expected in a hyper-competitive market.

Outflows (distribution of profits to limited partner-investors) may be good, as deals are wound up with a profitable IPO.  Or they may not be very good at all: maybe the only available exit is a not-very profitable sale to a publicly-traded buyer who pays with stock, which can only be unloaded over time and with some risk.

As with all things PE, it's complicated and murky.  But it's still interesting to watch the money slosh in and out.  And, as we shall see, the top PE principals/CEOs somehow manage to keep a good chunk of it again this year, thereby honoring our Third Commandment.

If we stand back and look at the big picture, we see that AUM in our SLAM37 fell by $419 billion.  Customer inflows of $41.3 billion were dwarfed by market/other drop of $460 billion.

Large-scale global trends such as GDP and population growth should push AUM upward over the next decade.  PriceWaterhouseCoopers issued a peppy, upbeat report predicting that global AUM will reach $100 trillion by 2020, mounting at a brisk compound annual growth rate of 6 percent.

If, as we argue, SLAM37 is a representative chunk of global AUM, then this was a below-trend year.  Or, maybe PWC is a bit optimistic.

Chart #3: Revenue as a percentage of AUM, also known as AUM Yield.

Here we look at compliance with the Second Commandment: Thou shalt charge such fees as the market will bear:

SLAM37 Ranked by AUM Yield (REV/AUM %), FY2015

There is a price war raging in the passive US equity segment, with the cheapest funds (usually Vanguard's) asking less than half that much.  Those cheap funds, offered by a not-for-profit firm, are very tough competition for firms like State Street, BlackRock and Invesco, who must try to make a profit.

Passive and active U.S. small-cap funds charge 37 and 113 bps, respectively.  And active European funds charge 188 bps.  Emerging market funds involve much more research and management effort, and charge for it.  A Chilean equity fund, for instance, gets 252 and 450 bps for active and passive.

These numbers give us the context to see how 47 bps is a plausible dollar-weighted AUM yield for our whole SLAM37.  The alternative managers at the top of the list charge a lot more for their wares, but they run far smaller AUM than the mega-managers who sell a lot of registered equity funds at middling prices to middling investors.

Our 37 managers offer a lot of vehicles besides those registered equity funds.  They also purvey hedge funds, private equity, closed-end credit funds (like Oaktree), REITs (like Cohen & Steers), separately-managed accounts, money-market funds for banks and institutions (like Federated Investors), and more, to all kinds of customer.

The rankings show us on a big-picture basis whether a firm is generally fishing toward the high or low end of the market in terms of risk and price.

At BlackRock, with its huge inventory of indexed iShares funds, top-line revenue is driven disproportionately by sales to retail/mass affluent customers, averaging out to just 24 bps.  They have over $1 trillion AUM in iShares.  If they spun it off as a separate firm, it would still be in our top five and among the biggest asset managers in the world.

Of course, BlackRock has lots of non-ETF products, too.  For instance, when they bought iShares from Barclay's Global Investors in 2009, the deal included hedge-fund assets now worth about $32 billion.  So they're significant alt investors, too, although some of it hasn't worked out.  In December, for example, they pulled the plug on their $1 billion Global Ascent macro hedge fund.  But a billion-dollar hedge fund here and there doesn't bulk very large among $4.6 trillion of AUM.

Mr. Fink's active funds (with their higher expense ratios) have been a major headache for him at a firm which has otherwise been flourishing.  Most of his active funds have been underperforming their competitors for years, and this has led to steady customer outflows in that category.

BlackRock has addressed the problem with a multi-year effort to hire more stock-pickers and analysts to upgrade active-fund performance.  "We're benefiting from the big macro trend out of the active into passive, and yet I'm probably investing more money on active than I have in years," Mr. Fink said in 2014, and the push has continued.

Two years ago he hired a new CIO for stocks: Christopher Jones, who was recruited from JPMorgan Chase Asset Management.  Mr. Jones has a good reputation but there has been no obvious turnaround in active stock performance or flows over the last eighteen months.

Now an even more senior executive has been recruited: Mark Wiseman, CEO of the Canadian Pension Plan Investment Board, will join BlackRock late this summer as head of global active equity with $275 billion AUM.  He'll have the rank of Senior Managing Director and will chair the firm's Global Investment Committee.  And, he'll also have a major hand in BlackRock's alternatives business.

I met him a few weeks ago in NYC and we had a nice chat, mostly about centenarians, a subject of particular interest to Mr. Wiseman.  We both enthusiastically agreed to do our best to join that club.

Mr. Wiseman was a private-capital specialist for most of his career, first at Ontario Teachers, and then from 2005 to 2011 at CPPIB.  In 2012 he got the bigger, broader job of Executive VP of Investments, overseeing the entire CPPIB portfolio; then in September 2014 he moved up to the CEO slot in Toronto for which he'd been groomed.  But Mr. Fink clearly thinks he has the chops to turn around their active stock book, with a few extra to help out with alternatives.

Mr. Wiseman made excellent money for a public-fund manager: over $3 million. We think that could double at BlackRock.  We also note that Mr. Wiseman's spouse Marcia Moffet joined BlackRock last summer as Managing Director for Canada.  With no disrespect to Ms. Moffet (who's very accomplished in her own right), one might infer from this that snaffling Mr. Wiseman has been a long-term project for Mr. Fink.

But, Mr. Wiseman will no longer be a CEO, master of all he surveys; he'll be two layers down from Mr. Fink, reporting to President Robert Kapito; and he'll be just one of 12 Senior MDs.

There's some serious talent in that group, including Global Head of Corporate Strategy Geraldine Buckingham (a McKinsey alumnus, trained surgeon and Rhodes Scholar), and COO Rob Goldstein (a two-time member of the Forbes 40 Under 40 and recognized tech entrepreneur).  But Mr. Wiseman (who's also a Rhodes scholar, by the way) should more than hold his own even in that fast company.

We expect to see the alternative managers with their 2-and-20 fee structure closer to the top of the chart, and we do.  Six of the top ten are alts.  Apollo is in the middle.  Only Oaktree eccentrically falls to the bottom of this ranking, with negative GAAP revenue.

Chart #4: Net income as a percentage of AUM.

Illustrating the Third Commandment: Thou must run a tight ship, such that a goodly portion of revenue reaches the bottom line.

SLAM37 Ranked by Net Income/AUM %, FY2015

But the 145 firms in Professor Demoderan's "Investments and Asset Management" sector is right up there with 17.80 percent.  It's in the top decile: ranked 8th-highest net margin out of 96 industries.  Pretty darn good.

But our SLAM37 does better still with a net margin of 25.15 percent ($21.596 billion Net Income/$85.863 billion REV = 0.2515).

His group includes all of our SLAM37, but also includes many ex-U.S. firms listed on foreign exchanges, most of which we've never heard of.  We suspect our SLAM37 are the pick of the litter among those 145 global firms in terms of size and profitability.

Our chart is ranked in terms of net income per AUM.  What it says is that our SLAM37 earns 47 bps in AUM yield (revenue per AUM dollar), and carries 12 bps of that to the bottom line.  (12 bps/47 bps = 25.5 percent, approximately the same number we got above, as it should be.)

But the ranking tells us that the median is higher than the dollar-weighted average.  So, some big firms are pulling down the overall number.

And there they are: All four of our mega-managers (over $1 trillion AUM) are in the bottom half of the chart (although JPM is only a hair below average.)

If we ignore the special case of Oaktree (a contrarian, counter-cyclical investor expected to have big year-to-year profit swings), the most conspicuous underachiever is State Street Global Advisors.

Again, we see SSGA struggling in FY 2015.  They earned only $236 million on $2.5 trillion AUM, carrying just 1 bps to the bottom line.  Their net margin (about 20 percent) was good, but starting with a far-below-average AUM yield of just 5 bps (see previous chart) makes them unprofitable compared to their peers, who had much higher AUM yields averaging 47 bps.

Only Legg Mason ranks even lower than SSGA on this chart.  They had negative customer flows of -3.7 percent and below-average AUM yield of 37 bps.  Their loss for the year seems to stem partly from a $371 million non-cash "impairment" charge related to their Permal fund-of-funds unit.  They announced several strategic investments/acquisitions at year-end to put a better face on soft numbers and maybe improve and diversify earnings going forward.

KKR not only tops our Revenue-per-AUM chart, they also bring a rather amazing 75 percent of their topline revenue to the bottom line.

Ranking high on this chart is good, all things being equal.  But some firms high in this chart are not necessarily thriving.

Kansas-based Waddell & Reed, a venerable mutual-fund advisor, has an excellent AUM yield of 123 bps and brings 20 bps to the bottom line; also good.

But that implies a sub-average net margin of 16 percent.  That suggests cost-control troubles.  Not so good.

But look at their customer flow two charts back: it's -11 percent for FY2015.  That's not good at all.

Their annual report supports our inferences.  They're trying to cut costs relative to revenue.  But there's not much there to suggest they're expecting revenue increases, or an end to persistent AUM outflows.  And one of their key people, Michael Avery, president and co-portfolio manager of their flagship Ivy funds, is leaving.

They've been around since 1937 and will probably find a way to survive.  But we think the context here is that smaller active-management firms generally face a tough market in which customers prefer low-cost ETFs over higher-cost active funds.  When their Q4 numbers came out in February their stock fell 14 percent to a 52-week low.

We're not going to get into the whole, tiresome active vs. passive conversation here, but it's obvious that some firms, due to skill or luck, have surfed the ETF wave for the past decade, while others are getting pounded by that same wave.

And finally,

Chart #5: What the CEOs were paid in FY2015.

SLAM37 CEO Compensation:

We have good reasons to think that his annual comp can't be much less -- or much more -- than $5 million, so we are reporting that as our official estimate. You may take that for what it's worth.

We stick to the official SCT numbers as much as possible because it supposedly puts all the CEOs on the same level playing field with regard to reporting requirements.  But of course it's not that simple.

The biggest divide in this data is between the owners/founders/principals and the hired hands.

Oaktree is a good example of a hired hand who turned out not to be.  Like the other publicly-listed alternatives managers, OAK was a private partnership before it morphed into the current Oaktree Capital Group LLC.

Technically, it had no designated CEO until it hired Jay Wintrob in 2014, although Bruce Karsh, founder, president and chief investment officer, essentially did the CEO job.

But, even though Mr. Wintrob was specifically hired as a CEO, the Oaktree principals effectively grandfathered him into the core partnership.  His earnings in 2015 and going forward are neither salary nor bonuses, but a share of the profits.  Except for some nominal amounts, all the Oaktree execs are profit participants; none receive conventional salaries or bonuses, except for some trivial amounts.  They want him to think and act more like a partner than an employee. (That's our short version of a very complex comp deal).

So, he was a hired hand who was adopted into the family and is now no longer a salaryman.

Ms. Erdoes at JPMAM is an example of a traditional "hired hand" senior exec with a traditional salary/bonus/stock award package, albeit a very good one.

She got salary and bonus of $7.7 million, plus a stock grant worth $9.5 million.  She has no profit participation in the sense that a partner would, just an accumulation of regular common shares carrying the same dividends and risks as any other stockholder.

The most curious cases are Messrs. Rubenstein and Conway, co-CEOs of Carlyle Group, and Mr. Black, CEO of Apollo.

The nominal amounts disclosed on the SCT and on our chart obviously bear no relation to what these gentlemen actually make.  Their partnership units and the dividend rates thereon are known and we can calculate the result, even though these partnership dividends don't have to go in the SCT table.  Mr. Rubenstein got $102 million in dividends in 2015, and Mr. Conway got $97 million.

But wait, there's more.  Both Carlyle CEOs can invest their own money alongside customers, and earn profits on it.  In prior years these numbers were disclosed deep in the SEC filings (but not in the SCT tables, since they are not, strictly speaking, compensation).  But in 2015 those amounts were suddenly no longer disclosed.  We can only speculate that some lawyer concluded that they were not absolutely necessary, after all.

In 2014 Mr. Conway got $252 million in profits (and/or returned capital).  Mr. Rubenstein got $132 million.  They may have had similar earnings in 2015, but we don't know.

Mr. Black has a very similar deal at Apollo, but his lawyer seems to think he still needs to disclose his co-investment profits.  His partnership dividends in 2015 were $182 million, and his co-investment profits were $17.9 million.

Mr. Gabelli, founder and CEO of GAMCO, often tops this list, but he was slightly out-earned this year by Stephen Schwarzman.  Mr. Gabelli has a wonderfully simple package: no salary, no bonus, no stock.  He just gets 10 percent of the firm's fee income off the top.  So, if you want to know what GAMCO's topline revenue is, just multiply Mr. Gabelli's comp by ten.

Mr. Schwarzman gets a nominal base salary of $350 thousand, plus a lot of "other."  In 2015 his $89.1 million "other" was essentially his contractual share of carried interest on Blackstone's deals.

Messrs. Roberts and Kravis at KKR are paid like Mr. Schwarzman.  They each get a nominal $300 thousand, plus a cash distribution from the firm's carry pool.  In 2015 they each got about $52 million based on their near-identical partnership interests.

Mr. Ochs' total earnings from Och-Ziff are far more than the $3.2 million in SCT comp.  He owns 157,127,052 of OZM's regular public shares, which paid him dividends of about $25 million in 2015.  This is pure investment income and not considered compensation by the SEC (or the IRS!).

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Investment performance is critical for an institutional CIO (and the main criterion for judging his or her performance).  But that pension/endowment/foundation CIO has been handed AUM by a higher authority and doesn't have to compete for it in the marketplace.  That's not her job.

Return on customer money doesn't enter directly into our asset-manager analysis for two reasons:

First, it's usually impossible to glean from the financial statements.  Return on certain "flagship" investment vehicles can be discovered, but an overall return would often be a meaningless hash averaging different products with different risk profiles.

Second, it's often not a direct driver of profits or senior-executive bonuses in this industry, at least in the short term.

Even down at the portfolio-manager level, AUM growth and retention often counts as much as return on customer money toward executive bonuses and professional advancement.

The formulas that drive exec bonuses in this sector are multi-factored, but they depend on much more then beating investment benchmarks.

McKinsey researchers have concluded that a full third of AUM growth in these firms is due to "sales alpha," as opposed to investment-return alpha.  That is: the effectiveness of the sales/distribution team.

(As we'll see, when senior managers are also principals and co-investors then, of course, investment returns have a more direct impact on their take-home pay.)

But returns on customer money do affect our model indirectly by driving AUM flows out of underperforming vehicles/firms and into higher-performing ones.

We hope we don't shock anyone when we point out that asset management is at least as much about marketing as about returns on customer money.  And we have to recognize that this is in considerable part what senior AM execs are paid for.

When returns soften then, eventually, AUM stops growing and shrinks.  Then, senior management is in trouble.  Google "Bill Gross" and "PIMCO Total Return Fund" for a recent case study.  But "eventually" may take a while to arrive.

Loyal customers, "innovative" products, and clever marketing can often make up for mediocre returns in the short run.