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Modest improvement expected for traditional asset manager earnings

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Modest improvement expected for traditional asset manager earnings

Analystsexpect modest improvement in asset managers' second-quarter earnings compared withthe first quarter, but they predict growth over the 2015 period will be rare amongthe bigger players in an industry facing long-term challenges.

Nearlyall of a select group of businesses included in an S&P Global Market Intelligenceanalysis show higher second-quarter EPS and revenue estimates than what the companiesreported for the first quarter.

However,estimates have just three of the 18 companies in the analysis bettering their second-quarter2015 EPS. Four are expected to book revenue increases compared with the prior-yearsecond quarter.

With the ongoing shift in preference among retail investors topassive management from active management, asset managers' profit margins are declining,said S&P Capital IQ analyst Erik Oja, who does not see that trend improvingfor them.

"What they're capturing in revenue as a percentage of AUMis a long-term trend which I think is continuing to worsen," Oja said in aninterview.

He does think some second-quarter AUM growth is probable forBlackRock Inc., and , he said.BlackRock's success keeping expenses down, a common fix among managers with marginspressured, should play to that company's advantage along with its business mix,Oja wrote in a July 2 note.

"[BlackRock's] top-tier position in passive investments,diversity and strong fund performance overall will help it continue to attract assetsat above-industry-wide average rates over the next few years," Oja wrote. Hehas a "buy" recommendation on the company's stock and estimated second-quarteroperating EPS to be $5.61, compared with $4.84 for the prior-year quarter.

He will be watching closely what companies are doing to respondto margin pressure as well as their performance, since the latter factor is stillone of the surest measures of earnings potential, Oja said.

"They've got to prove that they can add value," hesaid in the interview.

Keefe Bruyette & Woods analyst Robert Lee believes investmentflows will remain lackluster, with some companies able to show new business.

Better flows from institutional customers should offset the continuedchallenges in retail flows, Lee wrote in a July 12 note.

"We expect that organic growth in general remained tepid,with median organic growth relatively unchanged from the prior quarter," hesaid. Still, AllianceBernstein HoldingLP, Affiliated ManagersGroup Inc., BlackRock, Cohen& Steers Inc., Federated Investors and Invesco Ltd. could report organic growth for the second quarter,Lee wrote.

Larger managers with strategies in fixed income, ETFs and alternativeinvestments are able to attract new business to replace some of the outflows fromactive equity management, Lee said in an interview.

"I think you'll continue to see some companies are ableto work through those challenges because of a more diverse or differentiated productline," he said.

The quarter saw Affiliated Managers Group to buy minority equity interestsin five alternative investment companies. Affiliated Managers expects the acquisitionto add up to 80 cents in economic EPS in 2017.

T. Rowe Price will have to account for a $166 million during the quarter to compensateclients from a proxy voting mistake.

In Lee's note, he lowered his second-quarter EPS estimates forall except four of the traditional asset managers he covers, owing to moderatedasset returns, AUM levels and flow trends. Exceptions were his EPS estimates forAllianceBernstein, Federated Investors and Manning& Napier Inc., which he held at 45 cents, 50 cents and 20 cents,respectively. Lee raised his estimate for Cohen & Steers to 51 cents per sharefrom 46 cents per share.

For earnings reports, he will be looking for color from managerswith global exposure to the Brexit fallout.Companies might also continue to field questions from investors on implementationof the Department of Labor's new Conflict of Interest Rule, whose potential impacthas not faded from minds, Lee said.

"I think you'll probably see investors start to refocuson that to some degree," he said.

S&P Global Ratings maintained a stable outlook for the assetmanager sector, based on durable credit metrics, limited debt tolerance, variableexpense structure and strong cash generation.

"That said, we think growth in [AUM] in 2016 will continueto be sluggish at best for many, containing management fee growth," analystSebnem Caglayan wrote in a June 27 report.

S&P Global Ratings,S&P Capital IQ and S&P Global Market Intelligence are owned by S&P GlobalInc.

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