Money manager AUM growth takes a step back
Gains in fixed income fail to offset equity declines as top 500 managers' assets fall 2.5% in 2011
By Thao Hua | October 29, 2012
Total assets under management of the world's largest 500 managers fell 2.5% in 2011 to $63.1 trillion, and have yet to reach their pre-crisis level, according to the annual Pensions & Investments/Towers Watson World 500 ranking.
Last year's total AUM stood more than 9% below 2007's level when the largest 500 managers managed $69.4 trillion, and just shy of the $64 trillion total recorded in 2006.
In 2011, “a lot was driven by market movements, with extreme differences between equities and bonds,” said Craig Baker, global head of research at Towers Watson & Co. in Reigate, England. “Bonds were up ... whereas equities were down, so anyone (managing) a lot in bonds would have done better than anyone with a lot of equities in terms of assets under management,” he added.
The Standard & Poor's 500 stayed relatively flat in 2011, but the MSCI World index posted an 8% loss and the FTSE 100 declined by 6%. Emerging markets fared worse, with the MSCI Emerging Markets index dropping 20% for the 12 months ended Dec. 31. In comparison, the Barclays Capital Aggregate Bond index was up 7%.
Bigger was not necessarily better in 2011, with the top 20 managers reversing the annual growth trend from the previous two years in which they outpaced the overall top 500 managers. In 2011, the aggregate AUM of the top 20 managers declined by 7.2% compared with the previous year.
The reshuffling among the top 10 managers in 2011 was one of the most dramatic in years, although BlackRock (BLK) Inc. (BLK) was still the runaway leader for the third consecutive year with 43% more AUM than its next competitor.
BlackRock's AUM declined 1.3% to $3.51 trillion in AUM, about $2 trillion of which was managed in passive strategies.
“We're expecting a continued rise in passive management in all its guises,” whether it be in mutual funds or exchange-traded funds, said Robert W. Fairbairn, senior managing director and head of BlackRock's global client group, based in New York. “We also see clients continuing to increase allocations to alternatives in a quest for consistent alpha generation, and they are putting a greater focus on asset allocation and risk management.”
Allianz Group — the parent company of Pacific Investment Management Co. LLC and Allianz Global Investors — moved ahead of State Street Global Advisors to take second place at $2.117 billion, up 5.3%, largely because of the fixed-income strength of PIMCO. SSgA was third with $1.857 billion, a 7.6% decline partly because of falling equities markets during the year.
Many managers with a large percentage of AUM sourced from retail clients in active strategies suffered a slowdown, Mr. Baker said. For example, Fidelity Investments and Vanguard Group Inc. swapped spots from 2010, with Vanguard in fourth and Fidelity in fifth. Vanguard's $1.848 billion was up 4.7% from last year, while Fidelity had $1.716 billion, down 5.3%. Although Vanguard also has a substantial retail business, the company is not as dependent on the retail sector compared to Fidelity and its retail products are largely passive, sources said.
Elsewhere, J.P. Morgan Chase & Co. climbed three notches to sixth place, with a 2.9% increase to $1.341 billion. Michael J. O'Brien, London-based managing director and global head of J.P. Morgan Asset Management (JPM)'s institutional client group, sees three primary areas of growth for the firm.
The first comprises strategies that focus on “yield, income-generation and steady cash flows,” Mr. O'Brien said. Next are investment approaches aimed at accessing global growth, such as emerging markets debt and equities, and third are risk-sensitive strategies including minimum volatility and risk-parity strategies.
Bank of New York Mellon (BK) Corp. (BK), which was helped by the integration of $260 billion from liability-driven investing specialist Insight Investment Management Ltd., entered the top 10 at No. 7, up from 11th. BNY Mellon reported $1.26 billion in 2011, up 7.5%. Insight Investment Management “was one of the largest contributors as pension funds increase LDI. We had strong flows at Standish (Mellon Asset Management Company LLC) into emerging markets debt and global fixed-income products. A strong fixed-income business definitely helped us in 2011,” said Curtis Arledge, vice chairman of Bank of New York Mellon and CEO of BNY Mellon Investment Management.
Separately, international and global equity strategies also manage to attract new assets, despite broader markets suffering “a pretty rough year,” Mr. Arledge said.
Managers of European assets — particularly retail and equities — tended to struggle even more in 2011 compared with other regions, largely because of the fallout from the eurozone financial crisis. For example, both AXA Group, which was seventh in 2010, and Deutsche Bank, which was sixth, fell out of the top 10 to place 20th and 16th, respectively. Deutsche Bank AG's asset management business is “primarily (invested) in euro assets, primarily retail and primarily equities — three factors that would have led to a drop down the list in 2011,” Mr. Baker said. A change in research methodology accounted for some of the differences in Deutsche Bank's 2011 AUM compared with the previous year.
Both institutional and retail investors are expected to remain risk averse at least through the next year, sources said.
“Many clients know that in order to meet their liabilities, they need to take more risk but they're nervous to do so,” BlackRock (BLK)'s Mr. Fairbairn said. “That's because of low yields, low returns and volatility.”
Mr. Baker added: “We think equities are at fair value and government bonds are expensive. ... We wouldn't expect the same trend to continue (in 2012) whereby those managing bonds did much better than those in equities. So we might expect a slight reversal.”
Sridhar Chandrasekharan, chief executive of HSBC Global Asset Management based in London, is already seeing improvements so far in 2012. HSBC's AUM fell 8.4% to $847 billion at year-end 2011 compared to the previous year, largely because of what Mr. Chandrasekharan said were adverse equity markets and currency movements.
However, as major equity markets climbed this year and new client inflows helped to offset negative foreign-exchange effects, AUM at HSBC recovered in the first half of the this year to $857 billion. Among corporate and institutional pension funds, large-cap equities, credit and real estate strategies have attracted new inflows, Mr. Chandrasekharan said. Sovereign wealth funds, on the other hand, have favored real assets and natural resources investments.
Growth is likely to continue to be a challenge for all money managers, sources said.
“Asset management is at an inflection point,” said Elizabeth Corley, CEO of Allianz Global Investors based in London. “We think the opportunities will be radically different from the ones from last decade.”
In September 2011, Allianz's asset management division launched a plan to reorganize the business away from a multiboutique model to a two-pillar structure with a more independent PIMCO, based in Newport Beach, Calif. The remainder of the business was combined under Frankfurt-based Allianz Global Investors. As of Dec. 31, 2011, about two-thirds of Allianz's AUM was managed by PIMCO.
“The old model of boutiques based on asset classes isn't working as it used to for clients, particularly pension funds, who are not thinking so much down the asset class route but in terms of multiple asset classes,” Ms. Corley said. “It's about outcomes.”
Currency swings weren't a big factor in AUM changes during 2011, with the euro falling about 2% against the U.S. dollar. However, the yen's movement was slightly more dramatic, having appreciated against the dollar about 5.5% in 2011, helping to boost Japanese fund managers' AUM in U.S. dollar terms, Mr. Baker said. Assets managed by Japanese managers totaled $5.3 trillion, a 6.4% increase.
Aggregate assets managed by U.S. managers shrank by 1.1% to $33.1 trillion, and European managers' AUM total fell 7% to $21.3 trillion. As a group, firms domiciled outside of the U.S., Europe and Japan increased their share of AUM to 5.3%, or $3.3 trillion, from 5.1% the previous year.
Assets managed by leading passive managers decreased by 1.4%.
“This is the first year in a while that (leading passive managers) haven't grown quicker than active,” Mr. Baker said. “Again, it's worth bearing in mind that people tend to do more passive management in equities than they do in bonds, so there's an element of that. Also, it wasn't a massive swing the other way. It was more of a break in the growth trend.”
However, continued pressure on fees will lead to more passive investments “whether it be on the traditional side or smart beta side,” said Mr. Baker, referring to smart beta as active exposure in strategies that require “real skill” that cannot be easily replicated systematically.
The top 20 managers' share of total AUM also declined to 38.7% in 2011 from 40.8% the previous year, which “again is slightly different from last few years, in which the top 20 managers grew faster as a whole,” Mr. Baker said. “Part of that is because there are more passive managers among the top 20 and there's potentially more of an equity bias among them.”
Of the top 20 managers, U.S.-based managers ran 64.2% of the total while European managers had a 32.9% share. Japan-based managers had a 2.8% share. Bank-owned and independent managers remain dominant in total assets among the top 20, followed by insurer-owned managers, according to the survey.
For the largest managers, another potential hurdle for growth is that “at some point, clients may look at whether to keep giving money to the largest managers,” Mr. Baker added.
Despite its size, BlackRock (BLK) is keen to expand in a number of markets internationally such as defined contribution and third-party distribution. As of year-end 2011, about 60% of BlackRock's AUM was managed on behalf of clients in the Americas. Europe, Middle East and Africa made up about 29% of the AUM, while the remainder was sourced from the Asia-Pacific region. “Compared to some domestic players in (continental) Europe, for example, we still have a lot of room to grow,” Mr. Fairbairn said.
“Of course, we can only grow if our beta is efficient and our active strategies outperform,” he added.
This article originally appeared in the October 29, 2012 print issue as, "Growth takes a step back".