Key Takeaways from Asset Manager Earnings

There was little to alter our long-term view of the asset managers under our coverage, although we raised our fair value estimates on four of our names: Cohen & Steers CNS; SEI Investments SEIC; State Street Corporation STT, and T. Rowe Price TROW.

Outflows Continued to Affect AMG's Results in the Fourth Quarter; No Change to Fair Value Estimate
There was little in narrow-moat Affiliated Managers Group's AMG fourth-quarter results that would alter our long-term view of the firm. We are leaving our $105 per share fair value estimate in place. AMG closed out the December quarter with $723 billion in managed assets, down 3.8% sequentially and 1.8% year over year. Fourth-quarter net outflows of $11.3 billion were worse than our expectations for $10.0 billion in outflows but were much better than the $19.7 billion and $15.1 billion in net redemptions that AMG reported for the third and second quarters of 2019, respectively. That said, the negative 7.3% organic AUM growth rate (which excludes the strategic repositioning of $49 billion of AUM last year) was the company's worst annual results ever, and sets AMG up to produce negative low- to mid-single-digit annual organic growth for the next several years (a far cry from the positive 2.9% average annual organic growth the company generated during 2009-18).

Although average AUM was down 7.2% year over year, AMG reported a 1.6% decline in fourth-quarter revenue due primarily to mix shift and improved performance fee income. Full-year top-line growth of negative 5.8% was in line, though, with our forecast for mid-single-digit annual revenue growth. We expect top-line growth to be negative during our entire forecast period, as the company deals with not only weaker AUM growth but industry-driven fee compression, with the net result being a negative 7.4% compound annual growth rate for revenue during 2019-23. As for profitability, the company's full-year operating margins of 31.1% were 110 basis points lower year over year, and below our full-year target of 32%-34%, affected by higher compensation costs during 2019. Going forward, we expect any expansion of the firm's operating margins to be somewhat muted, with profitability hovering between 32% and 33% of revenue on average during our five-year forecast period.

Market Gains and Product Mix Shifts Help AGF Management in Fourth Quarter; No Change to FVE
There was little in no-moat AGF Managements's AGFMF fiscal fourth-quarter results that would alter our long-term view of the firm. We are leaving our CAD 6.50 fair value estimate in place. Total assets under management increased 3.6% (2.8%) sequentially (year over year) in the fourth quarter, leaving AGF Management with CAD 38.8 billion in managed assets at the end of November 2019. Mutual fund net outflows of CAD 181 million were a step back from CAD 103 million in the third quarter but still better than the segment's quarterly run rate of CAD 300 million in outflows the previous five years. AGF Management did, however, see inflows from both its institutional channel and high-net-worth operations, with firmwide net outflows of CAD 6 million marking its best quarter of flows since the first quarter of fiscal 2019, when the company reported CAD 278 million in inflows.

While average AUM was basically flat year over year, fourth-quarter revenue increased 5.5% due primarily to shifting product mix. Full-year top-line growth of negative 3.0% was basically in line with our forecast for a low- to mid-single-digit decline in revenue for fiscal 2019. Considering the headwinds we expect the purer-play Canadian asset managers to face--including increased competition from the big six banks and growing fee compression--AUM and revenue growth should continue to be muted, with low- to mid-single-digit average annual declines in AUM giving way to mid- to high-single-digit declines in top-line growth on average during fiscal 2019-23. The revenue shortfall affected AGF Management's full-year profitability, with EBITDA from continuing operations coming in at less than 24% of sales. We envision adjusted EBITDA margins being range-bound between 23% and 27% over our forecast period as the competitive environment in Canada pressures not only fees but profitability for the non-bank-affiliated asset managers.

Ameriprise's Results Are Trending Positively With the Stock Market; Shares Fairly Valued
Narrow-moat Ameriprise AMP reported decent results for the fourth quarter of 2019, as it benefits from its exposure to the stock market. The company reported net income of $463 million, or $3.53 per diluted share, on $3.3 billion of net revenue for the fourth quarter of 2019. Net revenue on an adjusted basis (which primarily excludes the gain from Ameriprise's sale of its auto and home insurance business) increased 5.5% from the previous year, due to the recovery in the stock market in 2019. Net income decreased 14% from the previous year on a generally accepted accounting principles basis from a large charge for variable annuities guaranteed benefits. On an operating basis (which primarily excludes the effect of model assumption changes for the company's insurance and annuity businesses and a gain from the sale of its auto and home insurance business in the quarter), earnings increased 1%. The company's operating return on equity (excluding accumulated other comprehensive income) remained strong at 38.3% for the year. We don't anticipate making a material change to our $181 fair value estimate for Ameriprise and assess that shares are fairly valued.

Decent Quarter for Bank of New York Mellon but Net Interest Income Still Under Pressure
Wide-moat Bank of New York Mellon BK reported fourth-quarter results that were in line with expectations, though net interest income is expected to decline sequentially in the first quarter of 2020. Excluding one-time items, revenue was flat from the year-ago period. Following the release of fourth-quarter financial results, we maintain our fair value estimate of $48 per share.

Total investment servicing fees increased 2% driven by asset-servicing fees and clearing services fees. Asset-servicing fee revenue was flat from the third quarter and up only 2% year over year even though assets under custody or administration rose 4% sequentially and 12% year over year to $37.1 trillion, which suggests continued fee pressure. Investment management and performance fees were flat while more market-sensitive foreign exchange and trading revenue declined. Total assets under management finished the year at $1.9 trillion, up 11% from the end of 2018, as market gains and currency impacts more than offset modest outflows.

Net interest income was down 8% from the year-ago period. Net interest margin, or NIM, was 1.09%, and though improved from the 1.00% reported last quarter, was down from the 1.24% in the year-ago period. Average interest-earning assets were 4% higher. Driven by lower investment yields and the fact that fourth-quarter net interest revenue benefited from elevated deposits in December, BNY Mellon expects net interest revenue to decline 5% sequentially in the first quarter. This implies an approximately 8% decline from first-quarter 2019. Management then expects net interest revenue to stabilize as the forward yield curve remains stable.

BNY Mellon continues to focus on expense control. Excluding notable items, expenses grew 2% due to technology investments and management expects a similar rate of increase in 2020.

Positive Flows and Market Gains Lift BlackRock's AUM to Record $7.430 Trillion in Fourth Quarter
While there was little in wide-moat BlackRock BLK fourth-quarter earnings to alter our long-term view of the firm, we expect to increase our fair value estimate to $550 per share to account for our expectations for better AUM levels and fees than we had been forecasting for the near to medium term. BlackRock closed out the December quarter with a record $7.430 trillion in managed assets, up 6.7% (24.3%) sequentially (year over year), with both organic growth and market gains contributing to AUM growth during the period. Net long-term inflows of $99.0 ($335.7) billion during the quarter (full year) were fueled by $20.6 ($109.9) billion of active fund flows, $3.2 ($42.3) billion of inflows from the firm's institutional index business and $75.2 ($183.5) billion in inflows from iShares. BlackRock's annual organic growth rate of 6.1% during 2019 was better than both management's ongoing annual organic growth rate target of 5% and our long-term forecast calling for 3%-5% annual organic AUM growth.

Average long-term AUM growth of 4.3% (16.1%) sequentially (annually) during the fourth quarter translated into an 11.2% (1.9%) increase in base fee revenue growth, as the company lapped a really difficult fourth quarter of 2018 (which also suppressed top-line growth the first couple of quarters of 2019). Total revenue was up 15.8% when compared with the prior-year's quarter and increased 2.4% on a full-year basis (better than our forecast calling for flattish revenue growth during 2019--much of which can be tied to stronger performance fee and technology and risk management revenue). As for profitability, BlackRock posted a 20-basis-point (70-basis-point) decline in full-year operating margins (when looked at on an adjusted basis) to 38.2% during 2019. Even so, we continue to project a slight expansion in the firm's operating margins during 2020-24, driven not only by the increased scale of BlackRock's operations but the efficiencies created by ongoing technology investments.

Solid Inflows and Market Gains Lift Cohen & Steers' AUM Once Again in Fourth Quarter
While there was little in narrow-moat Cohen & Steers' CNS fourth-quarter results that would alter our long-term view of the firm, we expect to raise the company's fair value estimate to $60 per share to account for our expectations for better levels of assets under management and fees than we had been forecasting for the near to medium term. The company closed out the December quarter with $72.2 billion in AUM, up 1.9% sequentially and 31.7% year over year. Net inflows of $1.6 billion during the quarter were predominantly driven by the firm's open-end funds. For the full year, Cohen & Steers pulled in $3.7 billion in net new assets, reflective of a 6.5% rate of organic growth (well above our forecast range of 3%-5% for 2019). That said, we continue to expect average annual organic growth to be within our 3%-5% forecast range for 2019-23 (given that we still have a market correction built into the midpoint of all of our asset manager forecasts).

With average AUM up 16.9% year over year and the company seeing a shift into higher-fee-generating AUM (with the firm's realization rate rising to 0.570% during the December quarter from 0.569% in the year-ago period), fourth-quarter revenue increased 17.0%. Full-year top-line growth of 7.8% was above our forecast for 6.8% revenue growth during 2019 due to the solid close out of the year, as well as shifting product mix. As for profitability, Cohen & Steers' full-year adjusted operating margins of 39.0% were a step up from 38.6% in the year-ago period and in line with our 2019 forecast for margins in a 39%-40% range. Going forward, we expect margins to be relatively flat, as the operating leverage that active asset managers like Cohen & Steers have traditionally enjoyed is blunted by higher operating expenses, with the industry expected to have to spend more to enhance/maintain investment performance and secure access to retail-advised platforms longer term.

Money Market Inflows and Market Gains Lift Federated's AUM During the Fourth Quarter and Full Year
There was little in no-moat Federated's FHI fourth-quarter results that would alter our long-term view of the firm. We are leaving our $33 per share fair value estimate in place. Federated closed out the December quarter with $575.9 billion in managed assets, up 9.2% sequentially and 25.2% year over year (with a major portion of the gain driven by a large influx into money market funds over the past four quarters). Net long-term inflows of $1.2 billion during the December quarter bucked the trend of quarterly outflows Federated had suffered through during 2018 and the first and third quarters of 2019, where quarterly outflows averaged $2.9 billion per quarter. Given that we expect the industry to continue to face stiff headwinds, we envision Federated's organic growth rate (which was negative 2.1% during the past year) to average negative 1%-3% annually during 2020-24, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.

While average long-term assets under management were up 24.0% year over year during the December quarter, product mix shift and ongoing fee compression left Federated reporting only a 16.5% increase in fourth-quarter revenue compared with the prior year's period. Full-year top-line growth of 16.8% was in line with our forecast calling for revenue growth of 16%-17% during 2019. As for profitability, full-year adjusted operating margins of 27.0% were nearly 500 basis points lower than 2018 levels but in line with how we expected the year to unfold (with Federated's margins coming in at the upper end of our forecast range of 25%-27%). We continue to expect increased expenditures aimed at improving investment performance and enhancing distribution to weigh on the company's profitability, forecasting adjusted EBIT margins of 26% and lower over our projection period, even as the firm increases its size and scale.

Market Gains Help Compensate for Elevated Outflows in Franklin Resources' Fiscal First Quarter
There was little in narrow-moat rated Franklin Resources' BEN fiscal first-quarter results that would alter our long-term view of the firm. We are leaving our $28 per share fair value estimate in place. The company closed out the December quarter with $698.3 billion in AUM, up 0.8% sequentially and 7.4% on a year-over-year basis. Excluding the Benefit Street Partners acquisition, which added $26.4 billion in AUM during the March quarter of fiscal 2019, Franklin's AUM was up 3.4% year over year. Net new outflows of $23.0 billion were close to $10 billion worse than our forecast for the company's fiscal first quarter, while total net outflows (which include exchanges and reinvested dividends) of $12.3 billion during the period were worse than our forecast for $7.7 billion in net outflows. Annualized organized growth of negative 7.6% for the December quarter was better than results for fiscal 2019 (negative 4.4%), but there is a bit of seasonality in the firm's fiscal first quarter, so we're sticking with our forecast for negative 4%-7% organic growth for fiscal 2020.

While average AUM was up 1.6% year over year, Franklin posted a 0.1% increase in fiscal first-quarter revenue, with most of the difference the result of shifting product mix and ongoing fee compression. Our full-year forecast continues to call for a mid-single-digit revenue decline. As for profitability, the firm's adjusted operating margins of 27.8% during the December quarter were down 140 basis points year over year, as compensation expenses rose to 27.6% of revenue (compared with 25.2% during the prior year's period), in line with our expectations for the full year. With asset managers like Franklin expected to face not only fee compression but margin compression over the long run (as they have to spend more heavily to improve investment performance and enhance distribution capabilities), we expect operating margins to hover closer to a 25%-27% range the next five years.

Outflows Continue to Mar Invesco's Results; Leaving Our $21 Per Share Fair Value Estimate in Place
There was little in narrow-moat Invesco's IVZ fourth-quarter results that would alter our long-term view of the firm, and we are leaving our $21 per share fair value estimate in place. Invesco closed out the December quarter with a record $1.226 trillion in managed assets, up 3.5% sequentially and 38.1% on a year-over-year basis. Excluding the impact of the Oppenheimer acquisition, which added $224.4 billion in AUM during the second quarter, the firm's managed assets were up 12.8% on a year-over-year basis, lower than we would have expected given the lapping of poor equity market results during the fourth quarter of 2018. Long-term AUM outflows of $13.3 billion during the December quarter were driven primarily, in our view, by merger-related outflows associated with the Oppenheimer deal. Invesco has been "conservatively" forecasting outflows of around $10 billion (4% of Oppenheimer's AUM) in the year following the close of the deal, but our projections have 5%-10% of acquired AUM lost to merger-related outflows during the first year, which the firm's organic growth seems to be tracking. While average long-term AUM was up 29.9% year over year, Invesco reported a 38.8% increase in fourth-quarter revenue when compared with the prior-year's period, as shifting product mix and better performance fee income lifted results. Full-year top-line growth of 15.1% was at the upper end of our forecast for 10%-15% revenue growth for 2019. We continue to believe that more volatile markets and a difficult environment for fees and performance will limit revenue growth longer term, and that 2019 should be viewed as an anomaly impacted more by the Oppenheimer deal than improving fundamentals. As for profitability, Invesco's full-year adjusted operating margins (which excludes the impact of transaction, integration and restructuring costs) of 24.2% were 100 basis points lower than 2018 levels, in line with how we expected the year to unfold.

Outflows Continue to Weigh on Janus Henderson; Expect No Immediate End to Negative Organic Growth
There was little in narrow-moat Janus Henderson's JHG fourth-quarter results that would alter our long-term view of the firm. We are leaving our $24/AUD 36 per share fair value estimate in place. Janus Henderson closed out the December quarter with $374.8 billion in managed assets, up 5.3% sequentially and 14.1% year over year. Net outflows of $6.7 billion during the period were worse than our forecast of $4.0 billion, driven primarily by net redemptions from quantitative equities ($3.3 billion), fixed income ($2.8 billion), and fundamental equities ($1.3 billion). While the outflows from quantitative equities is understandable, given that just 40% and 16% of AUM were outperforming their benchmarks on a 3- and 5-year basis, respectively, at the end of 2019, we should be seeing better flows from fundamental equities (where 76% and 80% of AUM were beating their benchmarks) and fixed income (where 84% and 92% of AUM were outperforming). The past year was Janus Henderson's worst year for organic AUM growth (of negative 8.3%) since the merger. Given our expectations for more volatile equity and credit markets in the near to medium term, as well as some disruption as Brexit moves forward, we believe that the firm will continue to struggle to generate positive organic growth. While average AUM was up just 4.2% during the fourth quarter, revenue increased 10.3% due to shifting product mix and meaningfully higher performance fee income year over year. Full-year top-line growth of negative 4.9% was at the lower end of our forecast calling for a mid- to high-single-digit decline in revenue during 2019. As for profitability, full-year operating margins of 24.7% were 350 basis points lower year over year, as the firm continued to work through costs associated with the merger integration (which should be done at this point) and absorbed higher compensation costs (as a percentage of full-year revenue) year over year.

Julius Baer: Market Disappointed by Lowered Guidance
Wide-moat Julius Baer BAER reported net profit of CHF 465 million for fiscal 2019, a 36% year-on-year decline. Two nonrecurring events did, however, have a material impact on results. On an adjusted basis, profit before tax came in at CHF 917, which was slightly ahead of the CHF 894 million we had penciled in for 2019 and 6% lower than the CHF 977 million Julius Baer booked in 2018. Julius Baer's updated guidance is slightly less ambitious than previously, calling for a midcycle return on common equity Tier 1, or roCET1, of greater than 30% compared with a return of 32% expected previously. Julius Baer is currently generating a 27% roCET1, but it is worthwhile to contextualize this, as recently as 2017 Julius Baer was generating a 32% roCET1. Julius Baer remains one of the European banks with the greatest capacity for organic capital generation, improving its common equity Tier 1 ratio to 14% by year-end 2019 compared with 12.8% at the end of 2018. We maintain our wide economic moat rating and our fair value estimate of CHF 56 per share.

Net new money growth for the second half of 2019 came in at 2.1% of assets under management, well below the almost 5% Julius Baer has added historically. Flows continue to be negatively affected by outflows from Julius Baer's Italian business Kairos. Gross margins of 82 basis points for fiscal 2019 declined slightly from the 86 basis points Julius Baer booked in 2018. Considering continued low interest rates, this is a reasonable outcome. Julius Baer is passing on negative interest rates to some of its larger clients, yet its clients still prefer to keep 17% of their investments at Julius Baer in cash.

The market was not impressed by Julius Baer's new guidance, which does target a lower roCET1, though it did commit to grow profit before taxes by 10% per year for the next three years. There are not many banks in our coverage list that are this confident.

Market Gains More Than Compensate for Equity Outflows in Legg Mason's Fiscal Third Quarter
There was little in no-moat Legg Mason's LM fiscal third-quarter results that would alter our long-term view of the firm. We expect to leave our $34 per share fair value estimate in place. Legg Mason closed out the December quarter with $803.5 billion in AUM, up 2.8% sequentially and 10.5% on a year-over-year basis. Outflows continue to plague the firm's equity AUM, which lost another $4.8 billion to net redemptions during the period as near- and medium-term investment performance fell off during the quarter. The company made up for some of the equity outflows with positive flows into its alternatives ($1.5 billion) and fixed-income ($1.7 billion) platforms, producing an annualized organic growth rate of negative 0.1% on long-term AUM during the firm's fiscal third quarter. Legg Mason recorded no net new inflows for its money market operations (which accounted for just 8% of AUM and 3% of revenue during the period). While average long-term AUM was up 8.5% year over year, product mix shift, as well as a slight increase in Legg Mason's realization rate (to 0.3461% from 0.3411%), left fiscal third-quarter management fee revenue up 8.7% when compared with the year-ago period. Total revenue increased 7.0% year over year, as distribution and service fees declined 6.3% and other revenue declined 24.8% year over year. Top-line growth of negative 0.4% during the first nine months of fiscal 2020 was in line with our full-year forecast calling for flat to slightly negative top-line growth. With regards to profitability, year-to-date adjusted operating margins of 18.4% represented a 70-basis-point increase year over year. Our five-year forecast continues to call for adjusted operating margins in a 16%-18% range, but we wouldn't be surprised to see periods where the company does stray outside of that range, noting that fee and margin pressure will continue to be a headache for the U.S.-based asset managers longer term.

Market Appreciation Helps Drive Asset-Based Revenue; Expenses a Bit Heavy
Wide-moat Northern Trust NTRS reported fourth-quarter financial results that were mostly in line with our expectations. EPS of $1.70 was down from $1.80 in the fourth quarter of 2018, though it would have been roughly flat excluding a charge to sell its lease portfolio and a nonrecurring software disposition charge. Expenses grew a hair faster than revenue, though over time we expect Northern Trust to generate operating leverage. Overall, our long-term view of Northern Trust is largely unchanged, and we are maintaining our fair value estimate of $93 per share.

Total revenue was up 3% year over year, driven by asset-based fees. Corporate and institutional services, trust, investment, and other servicing fee revenue grew 6% from the year-ago period, as asset-based fees benefited from market appreciation. C&IS assets under custody or administration finished the year 19% higher at $11.3 trillion. We expect modest fee compression to continue in the custody business, given the competitive landscape. Wealth management trust and investment fee revenue increased 7%, driven by higher assets under management, with the global family office business, which typically represents clients with at least $200 million in assets, growing the fastest.

Net interest income during the quarter of $430 million was flat from the year-ago period, and management expects a 2%-4% decrease in the first quarter of 2020 as some one-time items roll off and unfavorable currency mix shifts on the balance sheet weigh on net interest income. Expenses rose 5% during the quarter and were up 3% for the full year, driven largely by salary increases. As a result, noninterest expense as a percentage of noninterest income was 94% for 2019, up from 93% in 2018. We think expenses will grow modestly as the company continues to invest in technology, but over time we do expect some operating leverage.

SEI Has Some Nice Private Bank Wins, but LSV, Institutional Investors Continue to Face Outflows
Narrow-moat SEI Investments SEIC reported fourth-quarter results that were generally in line with consensus expectations. With double-digit revenue growth, the investment managers segment continues to be the star performer. The private banks segment reported some notable client wins, but margin expansion continues to be elusive. Net outflows in the institutional investors segment, investment advisors segment, and LSV are weighing on growth. Companywide, revenue and net income rose 4% and 11%, respectively, as market appreciation benefited asset-based fees. We are increasing our fair value estimate to $60 from $56 primarily due to market appreciation in fourth-quarter 2019 and year to date in 2020.

In the private banks segment, SEI's largest segment by revenue, this decreased 2% during the year primarily due to previously announced client losses. However, SEI reported some nice wins, including finalized contracts with Principal Financial (which acquired Wells Fargo's Institutional Retirement and Trust Business) and Iowa-based Bankers Trust (which we believe was using FIS Global's SunGard). In addition, SEI announced that in first-quarter 2020, it reached a deal with a large United Kingdom-based global bank. Segment operating margins were 4% for the quarter and 6% for the year. Margins are likely to be pressured in 2020 as the full-year impact of previously announced client losses is incorporated into its financial results. Over the long term, SEI hopes for margin expansion in 2021 and beyond, but previous expectations of margin expansion have failed to materialize.

The investment managers segment continues to perform well. Revenue grew 12% and net new recurring sales events for the year were $49 million, roughly equivalent to the sales events in 2018. SEI continues to win mandates in the alternatives (for example private equity) and traditional markets for fund administration. Operating margins also expanded to 37% from 34% in the year-ago quarter.

Expense Control Helps Offset Revenue Headwinds for State Street
Though wide-moat State Street STT continues to face business headwinds, the firm reported fourth-quarter results and a 2020 outlook favorable to expectations. State Street continues to face pricing pressure in asset servicing but is benefiting from higher market values driving asset management fees and expense control. Overall, we are increasing our fair value estimate to $77 from $73 per share.

Excluding a $44 million gain on subordinated debt, total revenue decreased 1%. Total fee revenues, which are roughly three fourths of the firm's revenue, increased 2% but this was more than offset by a 9% decline in net interest income. The increase in fee revenue was driven primarily by higher asset management fees and faster growth at Charles River Development. Looking ahead to 2020, the firm expects fee revenue to increase 1%-3% revenue growth, with asset servicing fees growing at the lower end of that range and asset management revenue growing at the higher end of that range. Charles River revenue is expected to grow by double-digit percentages.

Net interest income finished the quarter down 9% from the prior year, with the firm's net interest margin declining from 1.55% to 1.36%. One factor weighing on net interest income is that State Street continues to see a mix shift away from non-interest to interest-bearing deposits. In 2020, State Street's outlook calls for a 5%-7% decline in net interest income, a tad worse than the 4% decline in 2019.

Given the revenue headwinds, State Street continues to focus on managing expenses. Excluding notable items such as restructuring charges, expenses were down 2% in 2019 and State Street expects expenses to decline by 1% in 2020 as incremental investments and higher variable costs are offset by fewer roles in high-cost locations.

Positive Flows and Market Gains Lift T. Rowe Price's AUM to Record $1.206 Trillion in Fourth Quarter
While there was little in wide-moat T. Rowe Price's TROW fourth-quarter results that would alter our long-term view of the firm, we are likely to raise the company's fair value estimate more than 10% to reflect our expectations for better AUM levels and fees than we had forecast for the near to medium term. T. Rowe Price closed out the December quarter with a record $1.206 trillion in managed assets, up 7.1% sequentially and 25.4% on a year-over-year basis (as the company lagged a difficult fourth quarter of 2018). Net inflows of $2.8 billion during the quarter were slightly above the $2.4 billion quarterly run rate we've seen for flows at T. Rowe Price since the end of the 2008-09 financial crisis. Target-date funds continue to generate the bulk of the firm's organic growth, bringing in $2.8 billion during the fourth quarter. While average AUM was up 14.9% year over year during the December quarter, T. Rowe Price reported a 12.5% increase in revenue when compared with the prior-year's period, due to product mix shift and a decline in the firm's effective fee rate to 0.459% from 0.464% during the fourth quarter of 2018. Full-year revenue growth of 4.6% was at the upper end of our call for low- to mid-single-digit top-line growth during 2019, driven by the equity market recovery during the course of the year as well as easier comparables in the final quarter of the year. As for profitability, adjusted operating margins of 42.5% during 2019 were 120 basis points lower than 2018 levels, as compensation and occupancy expenses expanded at a much faster rate than revenue. While this was at the lower end of our full-year (as well as our five-year) forecast calling for operating margins of 42%-44%, we would note that the firm continues to make upfront investments in key regions and channels to help drive growth (and is likely to continue to take advantage of its better margin profile relative to peers to make additional investments that will help spur organic growth).

Outflows Continue to Mar Waddell & Reed's Results; No Change to $17 Fair Value Estimate
There was little in no-moat Waddell & Reed's WDR fourth-quarter results that would alter our long-term view of the firm, and we are leaving our $17 fair value estimate in place. The company closed out the December quarter with $70 billion in assets under management, up 1.7% sequentially and 6.3% year over year. Net outflows of $3.4 billion continued the trend of negative organic growth that has affected Waddell & Reed for much of the past five and a half years. Given our expectations for more volatile equity and credit markets in the near to medium term, we expect Waddell & Reed to continue to struggle to generate positive organic growth, with our five-year forecast calling for average annual organic growth of negative 7%-9%.

Despite average AUM being down 3.5% year over year, an improvement in the company's realization rate to 0.636% from 0.635% in the year-ago period, and higher underwriting and distribution fees year over year, allowed the firm to produce only a 0.8% decline in fourth-quarter revenue. Full-year top-line growth of negative 7.8% was in line with our forecast of a mid- to high-single-digit decline in revenue during 2019. Given our expectations for ongoing fee compression for the industry, and slightly higher underwriting and distribution fees for Waddell & Reed in particular, the company's top line will likely decline at a mid-single-digit rate annually on average during 2019-23. As for profitability, full-year adjusted operating margins of 14.8% represented a 440-basis-point decline compared with 2018--a sign of the negative operating leverage in the asset manager business model. This was, however, in line with our long-term forecast, which calls for not only fee but margin compression as active managers like Waddell & Reed work to narrow the fee gap with low-cost passive products and spend more heavily to enhance investment performance and distribution.