Asset management business
Banks and asset managers (XLF) had a great run in 2017 due to a rise in broad markets, allowing them to generate a higher base and performance fees. However, the stock market has seen some profit booking over concerns of a steeper yield curve in 2018. Overall, the economy and corporates are expected to continue on a growth trajectory helped by global demand and lower unemployment rates. The Trump administration’s reforms like, tax cuts and a manufacturing push, could give a new push to companies’ valuations.
Among major bankers, Bank of America (BAC) is managing $2.8 trillion in asset management offerings as of December 31, 2017—a rise of 10% on a YoY basis. The growth came on the back of new fund flows and a rise in holdings’ valuations. Higher operating cash flows and lower unemployment could lead to new flows toward various offerings.
Drivers in 1Q18
Interest rates have been a major driver in determining flows, outflows, and returns on various asset classes. Trade wars initiated by the Trump administration, oil prices (USO), commodities, and earnings could also decide the course of the market and fund flows.
In 4Q17, Bank of America’s Global Wealth and Investment Management segment managed a 17% rise in net income to $742 million, helped by $18 billion in new flows and higher operating leverage. The segment posted a pre-tax margin of 26%, up by 300 basis points on a YoY basis.
Lower alpha generation capacity for alternative managers including Carlyle (CG) and KKR (KKR) has led to flows moving toward ETFs. BlackRock (BLK), Vanguard, and State Street (STT) have been the biggest beneficiary of this move, followed by select brokers and bankers. The trend is expected to continue in 2018, given the ease and lower fees spent on these passive products.