Defined contribution assets jump 17.8% for largest managers

Top 5 firms account for nearly 73% of total; growth of target-date funds cited for increase

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Michael Falcon is seeing more use of target-date funds in smaller markets.

The 25 largest managers of defined contribution mutual fund assets reported an aggregate of $1.988 trillion in proprietary-fund assets for the year ended June 30, a 17.8% increase from the $1.688 trillion a year earlier, according to the latest survey by Pensions & Investments.

The asset growth for the latest period trampled the advance of 5% for the previous survey, which covered the 18 months through June 30, 2012.

The three largest firms — Fidelity Investments, Vanguard Group Inc. and Capital Research & Management Co. — accounted for 58% of the DC-plan mutual fund assets in the P&I survey. The five biggest firms — adding Pacific Investment Management Co. LLC and T. Rowe Price Group Inc. to the top three — represented nearly 73% of the total.

Fidelity Investments, Boston, held onto first place with $485.1 billion, up 11.8% from the previous survey; Vanguard Group, Malvern, Pa., was a surging second with $441.1 billion, up 19.8%; and Capital Research & Management, Los Angeles, which offers the American Funds family, remained in third place with $228.8 billion, up 9.7%.

T. Rowe Price, Baltimore, rose to fourth place with $149.4 billion in DC mutual fund assets, up 18.6% from its fifth-place finish in the previous survey. PIMCO, Newport Beach, Calif., dropped to fifth from fourth even though its mutual fund assets rose 7.2% to $140.8 billion.

A common theme among managers is the role of target-date strategies in propelling DC asset gains.

“Our target-date growth is across the board, and we're seeing an increased target-date fund penetration in smaller markets,” said Michael Falcon, managing director and head of retirement for J.P. Morgan Asset Management (JPM), New York. “Over 70% of net flows into the DC space are target-date mutual funds, commingled trusts and separate accounts.”

In the latest P&I survey, J.P. Morgan's proprietary target-date strategies rose 81% to $26.67 billion compared to $14.7 billion for the previous survey.

Overall, J.P. Morgan's DC mutual fund assets rose 54% to $45.2 billion from $29.3 billion, enabling the firm to vault into eighth place from 10th in P&I"s ranking.

The top 20 managers of proprietary target-date strategies used by DC plans ran a combined $601.8 billion as of June 30, a gain of 36.8% from the year earlier.

Fidelity remained the target-date strategy leader with $148.6 billion, up 15%. Vanguard was second with $127.8 billion, up 38%. T. Rowe Price advanced one position, recording a 63.4% gain to $83.1 billion. BlackRock (BLK) Inc. (BLK), New York, dropped to fourth from third, even though its target-date strategies' assets gained 32.7% to $77.6 billion.

QDIA driving growth

The increasing role of target-date funds as a qualified default investment alternative has driven the growth of this investment option, said Susan Powers, senior vice president for investment consulting at Fidelity Investments.

“The broad adoption of target-funds keeps growing for Vanguard as well as for others,” said Christopher McIsaac, managing director and head of the institutional investor group for Vanguard. “It's a big part of our growth story.”

Another contributor to Vanguard's gains is the increased adoption by DC plans of index mutual funds, a growth trend at Vanguard that has been going on for three or four years, he added.

Target-date funds represented “the lion's share” of the gains in DC assets under management at T. Rowe Price Retirement Plan Services, said Kevin Collins, vice president and head of sales and client services. “We're seeing growth across all markets. Our target-date fund franchise will continue to grow.”

Target-date benefit

The biggest mutual fund firms in the DC market weren't the only ones to benefit from greater plan participant use of target-date funds. “We're seeing an increased demand,” said Ryan Mullen, senior managing director and head of defined contribution investment business for MFS Investments, Boston.

Overall, MFS jumped to 12th place from 14th place as the MFS defined contribution assets climbed to $33.1 billion, up 49%.

The P&I survey also noted several shifts in allocation between the latest survey and the previous one as equity played a more prominent role. Domestic equity now accounts for 50.8% vs. 48.7% in the previous survey; international/global equity advanced to 15.2% from 13.4%.

Fixed-income components fell. Domestic bonds dropped to a 17.3% allocation vs. 19.6%, while money market funds fell to 6.1% from 7.4%. Balanced/asset allocation funds slipped to 10% from 10.9%. This category excludes target-date strategies.

Vanguard's Mr. McIsaac said the allocation declines in the fixed-income categories don't reflect a strategic shift by sponsors. “They're not rethinking a change in their lineups,” he said. ”This is more participant driven.”

Mr. Falcon of J.P. Morgan Asset Management (JPM) agreed, saying: “I don't see a big rotation out of fixed-income in the DC space.”

Among individual mutual funds most used by defined contribution plans, many of the previous survey's leaders were on top again. Among domestic equity funds, Fidelity's Contrafund held onto first place with $56.3 billion, up 14%.

PIMCO's Total Return fund remained atop the domestic fixed-income group with $111.1 billion, up 3.3%. PIMCO shouldn't be sweating about competition. Its fund's DC assets outnumber the defined contribution plan assets of the next 49 domestic fixed-income funds combined.

American Funds' EuroPacific Growth remained the leader of the international/global equity category with $61 billion, up 13%.

The Vanguard Wellington (investor class) fund dropped to second in the balanced/asset allocation category with $13.8 billion, down 2.5%, switching places with the American Funds Balanced fund, which posted $15.2 billion in assets, a gain of 19.7%.

Vanguard's Prime Money Market (institutional shares) moved into first place from second in the money market category with $13.7 billion, edging Fidelity's Retirement Money Market Fund, which slipped to second place with $13.5 billion. The Vanguard fund's assets rose 7.3%, while the Fidelity fund's assets fell by 4.6%.

This article originally appeared in the September 30, 2013 print issue as, "Assets jump 17.8% for largest managers".