NEW YORK (MarketWatch) -- With their fourth-quarter financial results, asset-management firms will likely turn a spotlight on some of the worst-ever numbers reported by the sector, as borne out by falling asset values, investor redemptions and declining margins, according to analysts.

In light of the bleak outlook, analysts who follow the sector have been busy cutting their bottom-line estimates for most money managers.

"We believe the fourth quarter is likely to go down in the record books as the sharpest one-quarter decline in operating earnings for most asset managers," said Robert Lee, analyst at Keefe Bruyette & Woods, in a report published Tuesday.

And while the fourth quarter will be bad -- a vivid reflection of the collapse in global financial markets that gained momentum in October and carried over into November -- the outlook for 2009 isn't much better.

"Sharply lower managed asset levels and the resulting drop in revenues will drive operating margins significantly lower, as expense reductions fail to offset the impact on the top line," said Matt Snowling, analyst at Friedman Billings Ramsey, in a research report dated Jan. 8.

The managers most likely to see the greatest year-on-year decline in operating earnings, Snowling told clients, are those that "historically exhibit the greatest operating leverage" -- T. Rowe Price Group TROW, -0.82% , Franklin Resources Inc. BEN, -0.79% and Janus Capital Group JNS.

Broad-based pain

Lee cut target prices and estimates for the fourth quarter as well as 2008 and 2009 for some of the asset managers that he covers. The biggest reductions in fourth-quarter estimates were for BlackRock Inc. BLK, -0.68% and Janus.

Specifically, Lee revised his estimate for Janus to a quarterly loss of 4 cents a share, down from a profit of 18 cents a share previously, and halved his quarterly profit estimate for BlackRock, to 80 cents a share from $1.61 a share.

He also reducted his 2009 profit estimate for Janus the most, by more than 21%, to 59 cents a share from a prior forecast of 75 cents a share.

"We expect [Janus'] flow trends to be pressured in the fourth quarter and into 2009, somewhat exacerbated by the recent weakness in performance in key growth products," said Lee.

In a similar vein, Credit Suisse analyst Craig Siegenthaler highlighted what called deterioration in how Janus funds hae performed.

Janus "displayed the largest deterioration in relative fund performance over the past month, as the percentage of assets under management rated four or five stars declined from 62% to 47%," Siegenthaler wrote in a Jan. 6 research note.

"This level is still 13% above the average asset manager; however, Janus' levels have declined significantly since August due to weaker fund performance at some of its large flagship funds (Contrarian and Overseas Funds are ranked fourth quartile in 2008)."

Because Janus' funds are mostly distributed through third-party, retail channels, inflows and redemptions are more sensitive to relative fund performance, Siegenthaler noted.

The asset-management sector's worst performers on a relative basis during December, he added, were Calamos Holdings CLMS and AllianceBernstein AB, -1.53% .

"Calamos has 4% of assets under management rated four or five stars, while AllianceBernstein has 19% of assets under management," he wrote. See story about Siegenthaler's view on AllianceBernstein's future.

Shares of Calamos gave up 8.7% this month as of early Tuesday trading, while AllianceBernstein lost 3.8%.

Franklin's fall

Late Monday, Franklin reported an 18% quarterly drop in its assets under management, to $416 billion as of Dec. 31 from $507 billion on Sept. 30.

This reflected a "combination of record outflows and a sharp drop in equity and fixed-income markets during October," said Snowling. Siegenthaler said it was becoming more likely that the firm would have to "significantly reduce" its headcount to avoid a large contraction in margins.

In response to the assets data, Siegenthaler said he's reduced his 2009 earnings estimate for Franklin, to $3.58 a share from $4.27 a share, while Snowling trimmed his projection to $3.59 a share from $3.62 previously.

"Our reduced estimates reflect lower average daily assets under management in the near term, as well as some marginal benefit from a less international sales mix on Franklin's distribution margin," said Snowling.

Keefe Bruyette's Lee sounded a bullish note on Frankin, his top pick among firms in the sector.

"Despite difficult near-term operating trends, we think Franklin has one of the more robust global business models among the asset managers we follow, and we believe that the company remains very well-positioned to generate organic growth over time," he said.

A glimpse ahead

Snowling said he has a cautious view on asset managers. He cited concern over how successfully firms could cut their expenses in the midst of their problems, and he's also doubtful about the prospect for net inflows into mutual funds at a time when many people are struggling financially.

For his part, Lee's more hopeful about asset managers' prospects, saying that fixed-income funds should be the first to benefit.

"The long-term secular demographic forces that have been driving the asset-management industry for the past several decades remain substantially unchanged as both individual and retail investors around the world will need to continue to invest their assets," he said.

"While the environment remains a challenge, asset-management stocks should be early beneficiaries of any improvement in the capital markets," Lee added.