Blackrock 3Q16 Earnings Call Notes

BlackRock’s (BLK) CEO Laurence Fink on Q3 2016 Results

Fiscal policy will be necessary to ignite economic growth

“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth. The lack of clarity around the outcomes of several upcoming political events including the path forward on Brexit, elections in the U.S. and the constitutional referendum in Italy is contributing to growing tail risk and investor caution.”

Retail investors continue to pull back from active equity investments

“retail investors continue to pull back from active equity investments driven by a combination of challenging long-term performance track records and also accelerating regulatory changes. 2016 U.S. active equity mutual funds has experienced more than $240 billion of year-to-date outflows. It’s worth year-on record with more than $110 billion of outflows in the third quarter alone, the same time we’ve seen strong flows from this client segment across our iShares equity ETFs which I’ll speak about in a moment.”

Regulatory changes are having a material impact on the retail ecosystem

“Regulatory changes having a material impact on the retail ecosystem the Department of Labor Fiduciary Rule RDR and MiFID are all impacting the way wealth managers serve their clients. We are likely to see a historical shift on how assets are being managed and invested as our distribution partners are changing both their product preferences and their use of technology to adapt to these rule changes.”

Technology is an essential component of adapting to regulatory changes

“I’ve emphasized the importance of technology many times today. Technology is an essential component of adapting to our regulatory changes and more broadly a changing investor landscape. As advisors take on greater portfolio construction responsibilities in a fee-based account they are increasingly using BlackRock solutions sophisticated tools and risk analytics to build better portfolios.”

DOL going to systematically move assets away from active

“we do believe, as it moves more towards managed portfolios, utilizing more of the centralization of models and corporate and asset allocation, it’s going to move quite a bit of money more towards passive strategies, utilization of ETFs. We do believe it’ll systematically move assets away from active, and so we’re trying to get prepared, but one thing we can say we’re certainty in our conversations though, it leads to greater need of risk management tools. ”

There is a need for more risk tools

“. I do believe one thing will be it’s going to be constant though the need for more risk tools they are going to be imperative to making sure that there is better oversight to protecting the firm making sure they are living under the new DOL rules.”

Gary Shedlin

Clients are facing significant challenges

“Our clients are facing significant challenges driven by increased regulation, market volatility, record low interest rates and disruptive technology and that’s a result the asset management industry is changing rapidly. During these times as we’ve done in the past, we reexamined our strategic priorities and evolved our business model with the goal of better serving the needs of our clients and optimizing organic growth in the most efficient way possible for our shareholders.”

Robert Kapito

There’s a lot of cash on the sidelines

So we have found there is such a significant amount of cash that’s on the sidelines because rates are so low and equities have not returned what people have expected that the money that is potentially in motion is probably the largest. We’ve done studies to show that globally there’s 50 plus trillion that’s sitting in cash. And I don’t think anybody knows how big that can be relative to the size of the markets. So depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion.

Brookfield Asset Management (BAM) Investor Day

Brookfield Asset Management (BAM) CEO Bruce Flatt said Asian insurance companies are shifting more of their portfolios into alternative asset classes

“Alternatives and foreign investments by Asian institutional investors continues to increase and some of those are just regulatory changes. China used to have a 5% cap, originally 3%, then 5%, now it’s 15% on foreign investments in insurance companies, and a lot of the amounts of money being driven out of Asia and out of China is really driven by these regulation changes that are happening in the funds and all of those things are shifting people towards more real assets and alternatives.  We think the trends will continue despite, irrespective of interest rates increasing and whether they put another 25 or 50 or 75 basis points on the short end.”

They believe that having boots on the ground is a competitive advantage

“One of the big advantages we have in real asset investing is that when we’re investing, developing a piece of real estate, building a toll road, running a power plant or running any one of our real asset type businesses, it’s hard work. It takes operating skills. It takes people. There are a tremendous amount of issues every day and that gives us a huge competitive advantage over a financial player or someone else that’s just going to do it on their own or someone that just starts up tomorrow morning. It gives us a big competitive advantage over them.”

They think the asset management and private equity market will grow to be $70 trillion in the next decade

“We think that industry that we’re marketing towards will continue to head towards around $70 trillion into the 2020s, and that we’ve put together the backbone to manage the growth and there’s really two things they want. They want investment performance but they want to be taken care of and we’ve invested the money to have the compliance, the governance and the servicing capabilities.”

All about relationships and good investment performance returns

“We have significant relationships that we’ve built with institutions to co-invest beside us and that allows us to do things which other people can’t and really it comes down to in an environment that we’ve been in. We’ve been able to generate the returns that are on this slide, which on the opportunistic side are in the 20s and in the core and value-add side are in the mid-teens, which are very good returns. These include the financial crisis vintages.”

They believe the Brazilian economy has likely bottomed out

“Interest rates look like they’re going to be low but commodities and emerging markets are definitely recovering and we think that Brazil has bottomed and I’d say we saw that based on the fundamentals of the businesses we have there in February or March of 2016, this year, and it’s going to be a slow way back but we think it’s slowly coming back.”

Doing large scale transactions which not many can compete with due to the size of the assets they’re going after

“If you think of the pipeline we just bought, it’s $5 billion; it’s in Brazil and it takes operating capabilities to underwrite and operate, and not many people could compete with that.  The fact is we just try to find spots where other people are not.”

Brookfield Asset Management (BAM) CEO Bruce Flatt wants a dividend policy which gives him flexilbility to buy assets during a market correction 

“We’ve had a view over time that we didn’t really want to have a high dividend policy, largely because we wanted to ensure that at the bottom of the market we could make unbelievable investments that allowed us to do things that others could never do.  It’s amazing what availability of capital does in the business. So you never want to have to go back and retrace your dividend with your investors because they really get mad at you.”

Brookfield Asset Management (BAM) Q2 2016 Earnings Call

Brookfield Asset Management (BAM) CEO Bruce Flatt said there are only a few places for rational capital deployment in a world of negative yielding sovereign bonds

“in essence there are only four places globally for this money to go and the first is U.S. Treasury. The second is corporate and asset backed bonds. The third is equities and the fourth is real assets. And real assets, predominantly real estate and infrastructure which are specialties are among the safest long duration investments for earning decent returns in this context for the type of institutions that own these securities.”

Good investors can still make money in this market

“You’re going to see moderate growth even in the best countries in the world and/or more moderate growth than you would have expected in the past. Despite that, some of the returns versus where interest rates are can be very attractive to real asset portfolios. And I just think if you look at what we can earn on real assets across the spectrum, you’re getting paid enormous amounts compared to Treasury bill or a U.S. Treasury or something like that and it’s probably — we’re at historic highs as the differential between what you can earn on a real asset, even on a core asset, versus an opportunistic asset to an interest rate Treasury. So look, I think we’re going to be in a more moderate growth world for a long time and a low — lower interest rate environment for a long time, but I still think that you’ll be able to — good investors will still be able to make a lot of money.”

 

Eaton Vance FY 3Q16 Earnings Call Notes

Eaton Vance’s (EV) CEO Tom Faust on Q3 2016 Results

Headwinds in asset management

“In our last quarterly call, I outlined some of the major challenges facing the asset management industry. These include a shift in investor demand from active to passive strategies, pressures on fees in both active and passive, a growing industry regulatory burden and rising costs of doing business. Unfortunately, nothing has changed over the last three months to lead me to believe that these challenges are going to abate anytime soon. Even with these headwinds however, the asset manager, asset management industry is big enough and diverse enough to permit some industry players to prosper. ”

Bank loan funds are hot when people think that rates are moving up

“We’re not really hearing much about credit. I think, it’s – the perception, I think, wrongly is that bank loan funds are investments you want to buy when you think rates are moving up, and there’s a perception that rates aren’t moving up. So I think it’s more of that than anything else. So I don’t think many advisors are hearing from their clients. I think, rates are going up 50 basis points, how can I prepare for that.”

Laurie Hylton

AUM $324B

“Average managed assets of $324.9 billion for the third quarter were up 5% in comparison with the prior fiscal quarter, driving both revenue growth and margin improvement. Revenue increased by 6% sequentially reflecting higher average managed assets, two additional fee days in the quarter and approximately $2.7 million in performance fees.”

Franklin Resources (BEN) Q2 2016 Earnings Call

Franklin Resources (BEN) CEO Greg Johnson on whether consolidation is coming to the asset management industry

“I think any industry that is maturing and gets larger, you hit a point where consolidation makes sense. I mean, I’m not sure we’re there yet, but certainly you have some outside forces at work that we haven’t seen before. So I think that will contribute. I think the other point that I’ve stated when asked about this is that it’s not the easiest industry to do large mergers and consolidations, you have separate contracts and boards, and it’s very time consuming and difficult to do a merger. So I think for us, we again are open to anything that we think enhances the line-up and creates shareholder value over time. And we try to build as many relationships across our industry to be able to act on things that make sense, and that’s where we are today. And I wouldn’t state one way or another. I think we’re always out looking on behalf of shareholders and trying to create value and if that’s a merger, if that’s an acquisition, we’re open to any and all.”

Franklin Resources (BEN) CFO Lewis Johnson in what they look for in investment management acquisition candidates 

“I mean we’re pretty active every year and looking at properties and some of us come to us, some of us we’re proactive on, and for the ones that we haven’t done, it tends to be, they don’t really meet our criteria. So quality, repeatable investment process, culture, price – yeah, price could be an issue and it has been in some cases. As Greg mentioned earlier, it’s not the easiest industry to integrate. We think about that. And also, a lot of – we come across situations where there’s ownership structural challenges as well. So, it kind of runs the gamut of why a deal doesn’t go through. But those are some of the things that we found.”

Oaktree Capital (OAK) Q2 2016 Earnings Call

Oaktree Capital (OAK) CFO David Kirchheimer said we have to expect lower future returns on all asset classes, including private equity, as a result of a world where central banks are keeping interest rates purposefully low

“Well I think that clearly when the Central Banks take the risk for your rate to zero, all other rates kind of emanate from that in the capital markets line kind of phenomenon. So it’s all a function of that. Now we have adjusted downward our client’s expectations and our own expectations as to what our strategies can provide. As I recall Bruce, when we started off at 1988, we thought the stress could do 25 to 30, and then we’ve had occasions since then, when we said 30 or more. And we are not saying 30 anymore or 25 or 20, but we are hoping for example to get 15, and we are targeting 15 in the investment decisions that we make, and we still believe we can make 15 and we may fall a little short of that. But that’s a goal that’s what we are underwriting to. We still think, we will clear the hurdles and it would be perfectly logical to go to the clients and say look 10 years ago, five year yields a six, today it yields one, the hurdle should be lower but we don’t want to have that conversation, the client still need the levels of return in excess of our hurdles and that’s what they come to us for and we still think we can get it, but of course as the capital market line comes down, achievement of any given return gets harder and that’s the world we live in but you know I don’t know want to go in there saying well how about if we start getting incentives at five on this spread and so forth and I don’t think that’s a necessary conversation and we just haven’t had a desire or felt the need to have that conversation.”

Oaktree 2Q16 Earnings Call Notes

Oaktree Capital Group’s (OAK) Jay Wintrob Q2 2016 Results

We are back to an environment that should reward credit selection and risk management

“At Oaktree, we consider these opportunities without attempting to time markets, instead focusing our efforts on volume up analysis. The past year validated this approach, the short term market durations, triggered by China growth concerns, energy and commodity prices, Brexit, and easy monetary policies of Central Banks including negative interest rates confounded forecasters. While it’s impossible to know what the future will bring in any of these regards, it appears we are back to an environment that should reward credit selection and risk management rather than aggressive behavior.”

It’s not an oaktree type market but we are finding some opportunities

“The areas that we’re deploying are largely energy related opportunities we’ve been seeing, power and then I mentioned the European NPL opportunity and while we continue to see those real estate also you’re seeing some interesting opportunities and also on the emerging market debt side there are some interesting things. Across all our strategies, there is some decent levels of deployment. It’s not an Oaktree type market, life with opportunities everywhere but we are seeing selected pockets and sectors that look interesting.”

Direct lending is something we’re doing more of

” It is something we are doing more of, we believe there is an opportunity there for the reasons that most people do, which is the banks not being as aggressive always involved in the small middle market space. And in fact direct lending adultery is nothing new. Basically the way, they think about us and we are having a separate dedicated direct lending fund, we actually engage in that through a number of our current strategies, certainly strategic credit looking well down in the capital structure, and also higher up in our middle market sponsored driven mezzanine strategy will be the two biggest.’

Howard Marks

The investment environment is what it is and we have to work within it

“15 or 18 years ago I wrote a memo called that is what it is, in which I said the investment environment is what it is, if we give in, we can’t change it and we can’t order up the new one, we have to work within it and this investment environment offers us lower prospects than ever but of course makes our products more important than ever to our clients and you know I dare say that most people have given up on getting the 7.5% that they require from main streams stalks and high grade box, well what does that leave? I think it leaves us in a pretty good position”

10 looks like nirvana now

“plus we have adjusted to the change in the environment over the last I would say roughly six or seven years by continuing to bring out an increase or suite of products designed to produce returns around 10 which you know 10-15 years ago, 10 looked like a modest accomplishment, now it looks like nirvana and you know we have a number of products ranging from strategic credits which Bruce mentioned and direct lending to European Credit solutions to [indiscernible] to enhance income to real estate debt, all of which we think will produce high single digits or 10 or so if things break right and you know as I said before now people say I don’t 9% wouldn’t that thing right”

You have to be modest about the amounts you can manage

“remember that Fund 7B was $11 billion and Fund 8 was $5.5 billion and Fund 10 is 3 and change, so we raised our standards and to have high standards in a low return world you have to be modest about your expected returns and modest about the amounts you can manage. The one thing you can’t do is say well, the capital market line is lower but I want the same returns I used to get with the same risk on the same amount of money.”

There’s nothing special about a hedge fund

” think that people have grown appropriately skeptical about well, I mean there was never anything about the term hedge fund that produced instant magic, you know hedge funds just a form of delivery and maybe a form of composition but all investment accomplishments still go back to superior judgment, you may not know Alex that I wrote a memo on hedge funds in 04 and you know what I said then is that when I first learned about hedge funds is probably in the 70s there were 10 hedge funds run by 10 geniuses and in 04 I said the day there are 5000 hedge funds and I don’t think they are run by 5000 geniuses and today we are up probably to 10000 and you know the performance of the greatest hedge funds run by geniuses and their closing created a huge umbrella over this industry which permitted the other 9990 hedge fund managers to start hedge fund and command hedge fund fees.”

I think clients are becoming more comfortable in taking liquidity risk

” if you want to get high returns in a low return environment you have to take some risk and the risk comes on a menu. And you can take data risk, you can take liquidity risk, you can take manager risk, you can take quality risk, there are many forms of risks to take and I think that clients are becoming – feeling better and better that if they have to risk they will just take it on the liquidity side.”

Bruce Karsh

Brexit didn’t generate the opportunity we thought it would but it’s still early

“Brexit did not generate the buying opportunity we thought it might from our distress related strategies, but it’s relatively early in this less positive part of the credit cycle. We still see European non-performing loan pools as an important part of the opportunities at and we continue to be active purchasers as banks look to rebuild our balance sheets.”

David Kirchheimer

We’re still targeting a 15% hurdle rate in this environment but it’s ratcheted down

“we have adjusted downward our client’s expectations and our own expectations as to what our strategies can provide. As I recall Bruce, when we started off at 1988, we thought the stress could do 25 to 30, and then we’ve had occasions since then, when we said 30 or more. And we are not saying 30 anymore or 25 or 20, but we are hoping for example to get 15, and we are targeting 15 in the investment decisions that we make, and we still believe we can make 15 and we may fall a little short of that. But that’s a goal that’s what we are underwriting to. We still think, we will clear the hurdles and it would be perfectly logical to go to the clients and say look 10 years ago, five year yields a six, today it yields one, the hurdle should be lower but we don’t want to have that conversation, the client still need the levels of return in excess of our hurdles and that’s what they come to us for and we still think we can get it, but of course as the capital market line comes down, achievement of any given return gets harder and that’s the world we live in but you know I don’t know want to go in there saying well how about if we start getting incentives at five on this spread and so forth and I don’t think that’s a necessary conversation and we just haven’t had a desire or felt the need to have that conversation.”

Lazard (LAZ) Q2 2016 Earnings

Lazard (LAZ) CEO Ken Jacobs said the market environment remains conducive for more corporate M&A

“The uncertain macro and geopolitical environment led to an industry-wide slowdown for M&A announcements in the first half of this year. But the backdrop remains in place for a sustained period of M&A activity. The global disinflationary environment continues to be a powerful catalyst for M&A, as the companies looked for strategic options to grow or to rationalize their business. Low and negative interest rates through most of the developed world implied that this environment may persist for some time.”

Lazard (LAZ) CEO Ken Jacobs said they took market share in their investment banking business in what is a tough environment for M&A transactions

“Our market share of large M&A transactions remain strong. For the first half of the year, our announced volume was down, but our number of large announcements valued at over $500 million increased 15%, even if the market decreased 5%. In Europe, Lazard played a lead advisory role on two of the largest announcements following the Brexit vote. We advised ARM Holdings on its sale to SoftBank, the largest-ever Asian acquisition of a UK company and Danone on its acquisition of the U.S. company WhiteWave.”

Surprised by the stability of the markets in the Post-brexit aftermath 

“I think we were all pleasantly surprised, especially the markets, by how the markets have performed post-Brexit. So I think we’ve probably, I think, settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote. Overall, as you know, volatility is never a good thing for confidence and therefore for M&A. I think their stability probably helped, I think what the markets are essentially saying is that there’s an impact of Brexit, I think at this point is largely reflected in what’s happened to the sterling, pound sterling and then also the ups and downs in various stocks in the market.  It doesn’t seem to have had much impact on the U.S. obviously because just when you look at the overall exposure of the U.S. to it, it is pretty minimal, as you’d expect. And with regard to Europe, I think, again, somewhat more benign than most people anticipated. So the effect on volatility, confidence, diminished. I think overall this is again going to be a strong driver for many of the multinationals in Europe to really think about where they’re going to get growth from.”

Benefitting from the large amount of bankruptcies and restructurings going on in the oil & gas business

“Restructuring had another strong quarter. Lazard is ranked number one globally for completed and announced restructuring assignments in the first half of the year. Our activity continues to be centered around the energy and commodity related sectors.”

Seeing good inflows in July

“In July, AUM continued to grow in the improving market environment. We continue to achieve a high level of gross inflows across our platforms, with net inflows in the quarter. Inflows were primarily driven by strategies in our global, multi-regional, and local equity platforms, with significant growth in our quantitative strategies.”

Asset management inflows into passive funds are driving up valuations 

“So I think CEO confidence is probably not at the levels that we saw a year ago, I think that it’s probably a little better than probably we would have guessed post-Brexit, but that’s something to keep an eye on. And on valuation, I mean the challenge on valuation is that we’re in a world where money is essentially free and people are investing heavily in risk-based assets and that’s driven up valuations. And on top of that you’ve had this massive move into passive funds, which, I mean fortunately for us we’ve been able to so far weather well on our Asset Management side, but to the market as a whole, and when you have this kind of movement into passive funds, you kind of have indiscriminate buying of equities, which tends to drive up valuations.”

Artisan Partners Asset Management (APAM) Q2 2016 Earnings Call

Artisan Partners Asset Management (APAM) CEO Eric Colson said active investment management is out of favor

“During the two trading days after the Brexit vote, our AUM declined from $98.7 billion to $90.1 billion. AUM then rebounded in the last three trading days of the quarter to end at $95.0 billion. Markets remain volatile. Faced with political and economic uncertainty, historically low interest rates, and full equity valuations, asset allocators continue to move wealth into high capacity, low fee products, many of which are momentum-oriented and further amplify volatility. In the short term, this is an unfavorable business environment for high value added active managers like Artisan Partners.”

Artisan Partners Asset Management (APAM) CEO Eric Colson said sometimes you can’t predict human behavior

“The Brexit vote is another reminder that financial incentives alone are insufficient to generate desired outcomes or explain human behavior. For a majority of the voters, sovereignty and self-identity appear to have outweighed short-term economic self-interest.  In managing our business, we keep that lesson in mind. Economic incentives matter, but talent needs freedom and time as well. Over the long-term, we believe that a transparent incentive structure, together with patience and flexibility, will generate superior outcomes for talent, clients, and shareholders.”

Artisan Partners Asset Management (APAM) CEO Eric Colson on how Brexit is impacting their business 

“In thinking about what Brexit means to Artisan from an investment perspective, remember that each of our autonomous investment teams develops independent views and makes its own decisions across the entire investment process – from the impact of global macro-economic events to views on particular regions, currencies, companies and securities. This independence can be seen in the differentiated returns of our Global Value, Global Opportunities, and Global Equity strategies, all of which have a global mandate. Through the lead up to and fallout from the Brexit vote, the three strategies performed differently from one another. While each of our teams invests with a strategy designed to foster discipline through short-term market shocks, we expect our autonomous team structure to deliver diverse sources of alpha.

Artisan Partners Asset Management (APAM) CEO Eric Colson discussed how the movement of investors into index products is hurting their inflows

“During the second quarter, we experienced net client outflows of $2.3 billion. While our gross outflows were in line with our quarterly experience over the last several years, we saw a slow-down in gross inflows which was at least partially attributable to the demand for high capacity, low fee products that we don’t offer. We are committed to managing our capacity and protecting the integrity of each team’s investment process, which is in the best interests of clients, talent, and, ultimately, shareholders. One of the ways we manage capacity is by holding the line on our fee rates. We are unwilling to lock in low rates that are not reflective of the value our teams add and the scarcity of their investment capacity. If we compete on scale and fees, we risk jeopardizing long-term performance and our ability to attract and retain investment talent. Over the long term, we expect that the assets we seek will follow performance and talent, even if current industry trends favor indexing and scale.”

Blackstone 2Q16 Earnings Call Notes

The Blackstone Group’s (BX) CEO Steve Schwarzman on Q2 2016

Macro background characterized by uncertainty

“We are executing against a macro background characterized by uncertainty, low and slowing growth and an astonishing low interest rates around the world. The 10-year U.S. Treasury recently hit its lowest point ever and one-third of developed nation’s sovereign debt is trading at negative yields, and I think two-thirds trading below 1%.”

We’ve been going through an extraordinarily strange period

“We’ve been going through an extraordinarily strange period recently really starting last summer with the scare set up by China’s currency devaluation. We then experienced the worst start of the year for equities since the great depression and either greater chaos in the debt markets caused by an incorrect read of weakness in China and weakening trends in the U.S. That was followed by a sharp and surprising market rally which left many money managers wrong-footed only to be hit again by Brexit in the last week of the quarter. And today, the S&P has moved back to an all-time high. Go figure, all kinds of odd things are happening that are affecting markets generally and are presenting what we expect could be very interesting investment opportunities.”

Transaction activity should be slower in the UK

” In the near-term transaction activity in the U.K. should be slower as decision-makers for businesses remains uncertain and market participants digest the potential impacts of the many different ways that Brexit can evolve.”

Brexit will likely have some modest adverse impact on global GDP

“Longer term, Brexit will likely have some modest adverse impact on global GDP. Although it’s too early to assess the full extent given unanswered questions like whether the U.K. will retain access to the European single market. Brexit will possibly constrain access to capital in Europe and you’re seeing those tremors hitting the banks and will embark the populist antitrade anti-immigration movements across the continent which is not good for the flow of capital and trade.”

Tony James

Credit markets are a great opportunity

“One of the areas of greatest dislocation in terms of technical factors is credit. The regulatory changes, the capital pressures on the banks, the weakness of their balance sheets and all those things accumulated to evaporate credit and credit markets – sorry, liquidity in the credit markets as Steve in particular has been commenting on. And that’s created a lot of pricing dislocation.”

“So I basically think credit markets in particularly illiquid credit markets are going to be a really, really great place to be going forward, thanks to the regulators and the government that are impairing the banks and the investment banks and the providers of liquidity. So very broadly this is a play on where we are benefiting from regulatory if you arguably overreach.”