Defined contribution mutual fund asset growth cools considerably

After past increases of 17% and 28%, top 25 managers gain a more modest 5% for period

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Looking: Chris McIsaac says growing fee scrutiny on the part of pension funds helped Vanguard.

The top 25 managers of defined contribution mutual fund assets reported a combined total of $1.69 trillion as of June 30, up 5% since the end of 2010, according to a survey by Pensions & Investments.

Following gains of 17% in 2010 and 28% in 2009, the latest advance was the smallest since equity markets began to rebound from the global financial crisis of 2008.

Sustained equity market volatility contributed to the slowdown. Amid a succession of up and down markets over the past 18 months, the broad Russell 3000 U.S. equity benchmark index rose by 10%, even as the MSCI All Country World index slipped 2.8%. The Barclays Aggregate Bond index climbed 10%.

The choppy market waters of the past year and a half played to some managers' strengths more than others, favoring those with established target-date fund lineups as well as those with lower-risk, lower-fee offerings.

A growing focus by plan sponsors and participants on the risks they're taking to achieve the outcomes they need continued to favor Pacific Investment Management Co.'s fixed-income offerings during the latest period and its inflation-hedging strategies in particular, noted John M. Miller, a managing director and head of PIMCO's U.S. retirement business, in an interview.

Newport Beach, Calif.-based PIMCO stood fourth in the survey's rankings, with a 22% gain during the past 18 months to $131.4 billion.

Demand for target-date funds and growing plan sponsor sensitivity to fees — further bolstering passive offerings at a time when active strategies have struggled — are trends that played to Vanguard Group's strengths over the past year and a half, said Chris McIsaac, managing director of Malvern, Pa.-based Vanguard's institutional investor group, in an interview.

Vanguard retained second place in the rankings with a 15% gain to $368.2 billion, narrowing the gap with market leader Fidelity Investments, whose $433.8 billion was little changed from the end of 2010.

Fidelity's asset totals treaded water over the past 18 months even as a new round of survey questions on target-date strategies showed the Boston-based money management giant retaining a commanding lead in the fast-growing segment. Fidelity's $118.1 billion in target-date mutual fund assets as of June 30 was just less than double second-place Vanguard's $61.7 billion.

Michael Shamrell, a Fidelity spokes-man, said Fidelity executives declined to comment.

Capital Research and Management Co., which retained third place in the rankings, reported a 10% decline to $208.5 billion, as risk-averse participants increasingly fled active equity in favor of bond strategies.

In an interview, Chuck Freadoff, a spokesman for Capital Research in Los Angeles, said recent disappointing returns for the company's Growth Fund of America prompted outflows, accounting for the bulk of the company's overall decline in defined contribution assets for the latest survey period.

According to data from Morningstar Inc., Growth Fund of America's results for the three years through Sept. 19 left that megafund in the 74th percentile of Morningstar's large-cap growth equity universe for the period. The fund's DC totals tumbled 40% in the 18-month survey period to $40.4 billion, slipping to second place in the rankings of domestic equity funds most used by DC plans.

Fidelity's Contrafund advanced to the top spot, from second place in P&I's prior survey, with an 11% gain to $49.4 billion. The Vanguard Institutional Index fund retained third place with $30.3 billion, up 27% from the year before.

Amid Fidelity and Capital Research's struggles, the top three firms' share of the 25 largest managers' combined assets slipped marginally below 60% as of June 30, down from a high of 68.4% at the end of 2006.

If a focus on active equity was more hindrance than help during the latest survey period, Baltimore-based T. Rowe Price Group Inc. managed to dodge the bullet. The firm retained fifth place in the rankings with $126 billion in defined contribution mutual fund assets, up 18% from a revised figure of $106.9 billion as of Dec. 31, 2010.

In an interview, Kevin Collins, a vice president and head of client service for T. Rowe Price Retirement Plan Services, said consistently strong investment results for T. Rowe's equity strategies and continued strong demand for the firm's target-date strategies helped it garner continued inflows during the latest period.

T. Rowe's June 30 target-date fund mutual fund assets came to $43.5 billion, the third highest total behind Fidelity's $118 billion and Vanguard's $62 billion.

PIMCO's Mr. Miller said even without a long-established offering, his firm has benefited from the flood of interest in target-date funds as “megaplans” and large plans increasingly put together their own customized target-date plans, and tap PIMCO funds as key components of those plans.

PIMCO's Total Return bond fund remained the largest mutual fund in the defined contribution universe with $107.6 billion, up 18% from the end of 2010. The next largest bond fund, Vanguard's Total Bond Market Index - Institutional, had $11.2 billion, up 25%.

Meanwhile, the target-date fund offering PIMCO launched less than two years ago is enjoying a dramatic pickup in demand, albeit from a low base, noted Mr. Miller. The $252 million PIMCO reported for its target-date funds as of the June 30 survey date already has grown to more than $400 million, and PIMCO expects the total to near $700 million by the end of the year, he said.

Demand for target-date funds helped power a 10% rise for BlackRock (BLK) Inc. (BLK)'s defined contribution mutual fund assets to $41.4 billion, the survey's sixth highest, although the firm's passive commingled fund vehicles have enjoyed even stronger growth, noted Chip Castille, a managing director and head of the firm's U.S. and Canada defined contribution business, in a recent interview.

As of June 30, the firm had $58.5 billion in target-date defined contribution assets for all investment vehicles - with a market-leading $50 billion in commingled vehicles and $8.5 billion in mutual funds - up from $40 billion at the end of 2010.

This article originally appeared in the October 1, 2012 print issue as, "Asset growth cools considerably".