Outlook grim for U.S asset managers' earnings

 * BlackRock kicks off sector's reporting season on Tuesday

 * Stock fund outflows rising, could last at least a year

 * Industry valuations dip

 By Muralikumar Anantharaman

 BOSTON, Oct 20 (Reuters) - Earnings at U.S. money
management companies likely slumped in the third quarter and
may deteriorate further in the short term as financial market
turmoil slashes asset values and forces heavy outflows from
funds.

 Their shares have been battered -- with some down as much
as 70 percent so far in 2008 -- and the sector's once-rich
valuations are now more down-to-earth. But given market
conditions, a sustained recovery for the sector is not in the
cards.

 "We are seeing considerable declines in the earnings power
of all the asset managers because of the pace and extent to
which the global markets have sold off," said Michael Kim, an
analyst at Sandler O'Neill & Partners.

 "And we are in the early innings of significant outflows to
come. That will weigh on the shares," Kim added.

 BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz), the largest publicly traded U.S.
asset manager, kicks off the sector's earnings season when it
reports third-quarter results on Tuesday.

 Over the next two weeks, a string of companies, including
Legg Mason Inc (LM.N: Quote, Profile, Research, Stock Buzz), Franklin Resources Inc (BEN.N: Quote, Profile, Research, Stock Buzz), T. Rowe
Price Group Inc (TROW.O: Quote, Profile, Research, Stock Buzz), Janus Capital Group Inc (JNS.N: Quote, Profile, Research, Stock Buzz),
Invesco Ltd (IVZ.N: Quote, Profile, Research, Stock Buzz), AllianceBernstein Holding LP (AB.N: Quote, Profile, Research, Stock Buzz) and
Affiliated Managers Group Inc (AMG.N: Quote, Profile, Research, Stock Buzz), will report earnings.

 Some prominent companies have already signaled what to
expect.

 Earlier this month, Franklin, Invesco and AllianceBernstein
reported early estimates of assets under management, the main
driver of revenue and profit for money managers, which showed
assets fell between 5.9 percent and 12.6 percent in the quarter
to Sept. 30.

 Panicky investors responded to the worsening of the credit
crisis from mid-September by rushing to the exits -- pulling
out a record $104.4 billion from U.S. mutual funds in September
alone, according to research firm Lipper Inc.

 'TIME TO BE GREEDY'

 With markets plunging in October, money managers have been
saddled with steeper drops in asset values and higher fund
outflows. The first two weeks of October saw outflows of $24
billion from stock funds, compared with $23 billion for all of
September, Merrill Lynch said in a report on Monday.

 Analysts estimated those outflows could last for at least
another year.

 "Outflows that follow particularly acute and concentrated
declines in equity values and draw an emotionally charged
response from investors are likely to endure, possibly for a
year or more after the market begins a sustained rebound,"
Keefe, Bruyette & Woods said in a report last week. The same
pattern was seen after the 1987 stock market crash, it said.

 The asset managers may have to take other hits. BlackRock,
Franklin, Janus and Federated wrote down the values of seed
capital investments -- companies putting their own money into
new mutual funds and hedge funds -- in the first quarter, and
expectations are that some of the firms could book additional
losses on those investments in the third quarter.

 Some companies may have to put up more capital to back
ailing money-market funds that made riskier investments.

 The funds have been hurt by the declining values of
holdings in asset-backed commercial paper due to the credit
crisis and have been forced to step in and shield clients from
losses.

 Legg Mason has said it expects to take a noncash charge of
$187 million, or $1.33 a share, in the quarter ended in
September for providing an additional $630 million in capital
for the money-market funds. Janus could also take a fresh
charge for supporting some of its money-market funds.

 The market meltdown has slashed valuations of asset
managers, whose shares have generally held up better than those
of banks and brokerages because they do not risk their own
capital.

 Janus, for instance, now trades at 9.3 times current
earnings, compared with 24 times six months ago and 35 times
two years ago.

 "Investors are less willing to allocate multiples to these
stocks similar to where they have traded historically," said
Kim of Sandler O'Neill.

 Some long-term investors, however, are welcoming the
opportunity to buy the stocks at fire-sale prices.

 "We love this industry," said John Miller, a fund manager
at Ariel Investments, which owns Janus, Franklin and T. Rowe
shares and recently bought more of them with a plan to hold
them for five or 10 years. "This is the time to be greedy."

 Companies      Q3 estimates,(vs Q2)       P/E  share price

               (Sept qtr, cents per shr)        (y-t-d, %)

 Alliance            74  (96)             6.00   -67.73

 BlackRock          187 (214)            18.04   -31.40

 Federated           54  (56)            10.24   -45.55

 Franklin           147 (171)             9.41   -41.40

 Invesco             34  (41)            10.10   -53.31

 Janus               24  (34)             9.30   -65.18

 Legg*               86 (-22)             8.75   -69.98

 T. Rowe             56  (60)            16.04   -35.17

 * Excludes noncash charge. Legg's P/E is based on earnings
estimated for year ending in March 2009.
(Editing by Jeffrey Benkoe)