U.S. asset managers are expected to post strong quarterly results compared with last year's dismal showings, but still face challenges from erratic stock markets that have encouraged many retail investors to focus on less risky products.

Industry analysts warn that asset flows, which picked up earlier in the year, were surely dented by the last quarter's market tumult. That will weigh down earnings and could spell more difficult times ahead for the companies that invest the retirement and college savings of Americans.

Fund firms ranging from the industry's biggest -- BlackRock Inc with $3.4 trillion in assets under management -- to smaller rivals such as Janus Capital Group Inc and money market specialist Federated Investors Inc begin releasing earnings this week.

Broadly speaking, it's going to be a relatively challenging quarter, said Sandler O'Neill analyst Michael Kim. The market environment was pretty tough in the second quarter.

The focal point of the quarter was the startling and still unexplained, flash crash on May 6, when the Dow Jones industrial average plunged some 700 points in just minutes before sharply rebounding.

For many investors still nervous about the stock market, given a sluggish economy and high unemployment, the flash crash was the final straw. Industry data show clients hurriedly removed money, again favoring safer options such as bonds.

The franchises that are more skewed toward retail equities are going to come under more pressure, said Kim.

Kim pointed to Janus and Waddell & Reed Financial Inc , which received a lot of attention for having been a big seller of stock index futures contracts at the time of the flash crash, as two names most susceptible to market pressures, given their asset mix weighted toward equities.

Janus, the Denver-based fund firm, is expected to report earnings of 14 cents a share and discuss its results on Thursday.

Across the sector, cumulative equity fund flows were mostly negative throughout May and June. During the final week of the quarter alone, net cash outflows from equity funds, excluding exchange traded funds (ETFs) totaled $957 million, according to Lipper FMI, a Thomson Reuters company.

During the last week of June, taxable bond funds, excluding ETFs, recorded inflows totaling $269 million and posted $4.9 billion of inflows during the month of May, Lipper FMI data shows.

Inflows to bond funds have remained strong in the early days of the third quarter, while selling of stock funds accelerated.

Analysts have cut earning estimates for many asset managers to reflect a decline in management fee income based on lower assets under management, said Tim Gaumer, director of fundamental research with Thomson Reuters' StarMine, which forecasts future earnings by putting more weight on the recent views of top-rated analysts.

But Sandler O'Neill's Kim said this quarter's mixed bag includes good news as well, especially for larger firms that have out-sized fixed income franchises to offset equity declines and spur organic growth.

Eaton Vance Corp and T. Rowe Price Group Inc are two companies that Kim thinks will show above average flows.

According to Morningstar, Inc estimates, Eaton Vance took $3.3 billion into its family of funds during the quarter, while T. Rowe Price scooped up $3.4 billion, excluding money markets.

Analysts, including Kim, also highlighted Franklin Resources Inc as a probable flow winner.

Generally, inflows to fixed income products are expected to stay reasonably positive through the summer, said Robert Lee, an analyst at Keefe, Bruyette & Woods.

Lee said that, as the asset mix at these managers slants toward lower-fee assets, there will be some impact on revenue, but the brunt may not be reflected in second quarter results.

Despite a challenging quarter, Lee expects fund managers still experiencing outflows to begin to right their ships.

If stabilizing market trends continue, analysts expect asset managers to put profits to work for shareholders in the form of share repurchases and dividend payments.

For a related graphic, click http://link.reuters.com/pun77m

(Reporting by Lauren Keiper; editing by Ros Krasny and Andre Grenon)

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