While the overall outlook for asset managers remains negative, the second quarter was a strong one, says Moody's Investors Service in a new report.

Strong markets drove growth in assets under management (AUM), management fees, and cash flow in the second quarter (Q2) for the asset management firms Moody's covers, according to the report.

The firms that Moody's covers saw long-term AUM rise by 5.4% during the quarter, the report says, led by BlackRock and T. Rowe Price.

Long-term net flows were positive in Q2, with flows amounting to 0.9% of AUM. However, excluding BlackRock, industry net flows remained modestly negative, the report notes.

"Organic asset growth improved, but remained slightly negative. Fee rates improved modestly and performance fees were up year-over-year," the Moody's report says.

For the asset managers Moody's rates, "EBITDA rose 6.1% sequentially and 8.9% versus Q2 2016, reflecting higher average AUM and stable management fee rates," the report adds.

Despite the strong quarter, Moody's outlook for global asset managers remains negative, driven by the ongoing rotation of assets from pricier active products into low-fee passive products, pressure on fees and regulatory developments that could hamper sales and increase compliance costs.

Additionally, high asset valuations and global macro divergences increase tail risks for asset managers. "As we assess our 2017 outlook more than midway through the year, we are reminded of how correlated the industry is to market conditions," the Moody's report says. "High asset valuations in the short term can mask long term challenges."

Indeed, the firms Moody's covers were generally unable to generate positive organic growth amid strong markets, "reinforcing our concerns regarding industry headwinds facing active asset managers."

"Furthermore, high asset valuations have increased drawdown risk as markets continue to rally. Excess valuation is a concern, particularly given waning confidence in the ability of the Trump administration to implement its pro-growth policy agenda," the report concludes concludes. "That being said, the pace of outflows from active equity did slow during the quarter, and market appreciation continued to support the stability of earnings…"