By Ross Kerber
BOSTON (Reuters) - In the midst of the stock market's giant first quarter, the best since 1998, investors drove up share prices of money managers expecting booming results. But as the results came in, investors headed for the exits after discovering just how reliant money managers remained on out-of-favor stock funds.
Starting on April 18 with BlackRock Inc
"When you have inflows into fixed-income funds and outflows in equity funds that equates into margin and fee pressure," said John Miller, a portfolio manager for Ariel Fund in Chicago, which owns shares in Franklin, T. Rowe Price Group
Through Thursday, shares of BlackRock had lost 9 percent since the New York firm reported just a 1 percent increase in profit last month. Janus has lost 9 percent since its underwhelming earnings report on April 24. And shares of Franklin, based in San Mateo, California, have traded down 5 percent in the days since it reported.
The share movements show how just how hard it is for many investors to judge fund companies based on broad market currents, said Gib Watson, chief executive of Envestnet Prima, an asset management research company. And the quarter's results provided a stark reminder that the companies can't count on equity products as they did in the past.
"Investors remained scarred, scared and conservative coming out of the global financial crisis," Watson said.
Investors fled equities after many were burned by volatility in recent years, but as usual many are fighting the last war. The Standard & Poor's 500 Index <.SPX> finished the first quarter at 1,408.47, up 12 percent from the end of December and up 6 percent from the end of the first quarter of 2011.
Fearful investors missed the rally. Investors pulled $21 billion from actively managed large cap U.S. stock funds during the first quarter of 2012, according to Chicago research firm Morningstar Inc That marked the eleventh straight quarter of net outflows in the high-profit category, which was once the industry's bread and butter. In all, U.S. stock funds lost $13 billion in the first quarter and $121 billion over the past 12 months.
All other top categories of long-term funds took in money including international stock funds, bond funds, and those that invest in commodities or alternative areas like real estate.
That helped the companies with non-traditional products, according to Goldman Sachs analyst Marc Irizarry. Several managers also looked to impress investors by boosting their dividends in the quarter including T Rowe Price, Invesco and Legg Mason
The higher dividends were "in line with the trend of investors seeking income and flows towards income products," he wrote.
Shares in several companies have been flat or down since they announced results, driving a decline in the Dow Jones index of U.S. asset managers <.DJUSAG> since the end of March. In retrospect, the strong stock market in the first quarter boosted
total assets at most of the managers, and that helped bolster fee income. But anticipating even higher earnings, investors drove up shares in big asset managers during the run-up to earnings season.
That only set up companies like BlackRock for disappointment. Shares of the company, the world's largest asset manager, fell 3 percent on April 18 after it reported a revenue decline of 1 percent to $2.2 billion. Assets rose 5 percent during the quarter but only 1 percent compared with a year earlier.
BlackRock's problem was that flows went to the company's indexed funds instead of actively managed accounts that generate higher fees.
Franklin Resources also failed to capitalize on the rising market. Its shares fell 3 percent on May 2 even though it reported a quarterly inflow of $5.6 billion, since the flows fell short of investor expectations.
Flows to U.S. equity funds were just $200 million, for instance, which contributed to an overall flow total that Nomura analyst Glenn Schorr described as good but not great -- or, as he put it in the headline of a research note to investors, "Good, but Not Franklinsanity."
(Reporting By Ross Kerber; Editing by Aaron Pressman and Steve Orlofsky)