Each of the 10 largest asset managers today has more worldwide assets under management than the entire universe when Pensions & Investments was founded 40 years ago.
The asset pool has ballooned nearly eightfold in that time: Assets under management worldwide in 1977 (the first year P&I had detailed data on the worldwide assets) totaled slightly more than $600 billion, while assets at year-end 2012 were more than $46 trillion.
Today, independent money management firms, some with trillions in AUM, dominate the top 10 money managers in P&I's ranking, where bank trust companies and insurers were the majority when P&I launched. The multiasset-class firms have some advantages in retaining talent and maintaining global enterprises, while smaller boutique firms with specialist approaches are also winning business.
Changes in the capital markets have fueled the growth of money managers. Banks in a post-financial crisis world are more constrained by capital requirements and other regulation. Stocks and bonds, while still the largest asset classes, are only two of the many options investors have to put money to work.
In P&I's first compilation of the top managers in 1974, which includes only U.S. institutional tax-exempt assets under internal management, six of the top 10 were trust banks and insurance companies.
First National City Bank, which ranked third with AUM of $7 billion as of Dec. 31, 1974, later became part of Citigroup and finally, when Citigroup got out of the business in 2005, became part of the asset management unit Legg Mason (LM) acquired when it transferred its brokerage unit to Citigroup. Legg Mason ranked 20th in the most recent P&I survey, with $648.8 billion in AUM in the year ended Dec. 31, 2012.
Also gone is Manufacturers Hanover Corp., which ranked sixth in the 1974 survey, with AUM of $5 billion. The banking company withdrew from the institutional money management business in 1988, selling its unit to Mitchell Hutchins Asset Management, a Paine Webber subsidiary.
Both the bank and Mitchell Hutchins no longer exist. Manufacturers Hanover was folded into oblivion itself after being purchased by Chemical Bank in 1992 while Mitchell Hutchins later became part of Swiss bank UBS, when it bough Paine Webber in 2000.
Another major player in 1974, fifth-ranked life insurer Metropolitan Life Insurance Co., sold its asset management business, State Street Research & Management, to BlackRock (BLK) Inc. (BLK) in 2004. But Metropolitan Life is getting back into the business, announcing a year ago that it was forming a new unit, MetLife Investment Management.
Unseating the old guard
But the unseating of the old guard banks from the top tier of money managers over the last four decades has not been universal.
Morgan Guaranty, a trust bank that became J.P. Morgan, is still a leading money manager, but as part of an even larger merged financial conglomerate. That occurred when J.P. Morgan & Chase Manhattan Co. merged in 2000.
In comparison, the list of P&I's top 10 compiled with data through Dec. 31, 2012, show a variety of firms, including public and private independent companies specializing strictly in asset management along with managers owned by banks and insurance companies.
Top ranked are BlackRock (BLK) Inc. (BLK) with $3.8 trillion in total worldwide assets; Vanguard Group Inc., $2.2 trillion; State Street Global Advisors, $2 trillion; Fidelity Investments, $1.9 trillion; and Pacific Investment Management Co., $1.6 trillion, according to P&I data.
The largest six firms control about 50% of the business, noted John C. Bogle, founder and retired CEO of Vanguard Group, and “they are still coining money.”
And even though Vanguard is one of those firms, Mr. Bogle is concerned about the trend.
“It's actually kind of frightening what's happening,” he said. “I'm not sure it's good for the industry or good for investors that one firm can be so dominant.”
Mr. Bogle said Vanguard grew because it embraced low-cost indexing and changed low fees. “In an industry where price is everything, we have the low price, we have the economies of scale,” he said.
Geoffrey Bobroff, founder and president of Bobroff Consulting Inc., East Greenwich, R.I., said he would have thought “banks would have been the leaders here today.” That's because “banks were the places four decades ago where people went to manage their money (private asset management), they were perceived as being the place to go.”
But Mr. Bobroff said firms that have made asset management their only focus, like the BlackRocks, PIMCOs and Vanguards of the world, have had a better history of attracting and retaining key investment personnel, resulting in better investment results overall.
“You can properly incentivize people in a monoline business easier than you can in a conglomerate,” he said.
John Casey, chairman and a founding partner of money management consultant Casey, Quirk & Associates, Darien, Conn., agreed. He remembered in the 1980s when First National Bank of Chicago hit hard times, ultimately leading to the spinoff of its money management arm, First Chicago Investment Advisors.
“What caused the First Chicago organization to disappear was that the bank's board was very punitive in 1989 toward the asset management business because the bank got into trouble in real estate in Brazil, and ended up saying, "well gee, everyone should suffer around here,'” Mr. Casey recalled.
He said that prompted Gary Brinson, First Chicago Investment Advisor's then-CEO and chief investment officer, to lead a $100 million buyout and form his own firm, Brinson Partners Inc. Mr. Brinson later became affiliated with a bank again; his successful firm was acquired in 1994 by Swiss Bank Corp., which in turn merged with Union Bank of Switzerland to form UBS. Mr. Brinson ran the asset management unit of Swiss Bank Corp. and later UBS Global Asset Management.
The return of Wells Fargo
One bank that has been making recent inroads back into money management is Wells Fargo & Co. Its unit, fifth largest in the world in 1994 when it was known as Wells Fargo Nikko Investment Advisors, was in 35th place in P&I's latest survey.
The bank's asset management roots go back to 1971, when it introduced one of the first institutional index funds. In 1990, it sold 50% of the business to Japan's Nikko Securities Co. By the end of 1996, Wells Fargo decided to focus on its smaller active asset management business and sold its remaining 50% share in the institutional indexed business to Barclays Bank, which renamed the business Barclays Global Investors.
In the last decade, Wells Fargo Asset Management has built its investment capabilities through a series of acquisitions — including Montgomery Asset Management LLC and Strong Financial Corp., in 2003. Evergreen Investments was acquired in 2004, as part of Well Fargo's purchase of banking giant Wachovia Inc. It has added complementary investment strategies during the past two years.
“We've built our business very deliberately through a series of important transactions, which has allowed us to bring on board a number of very talented team members and broaden the investment capabilities we offer clients,” said Michael Niedermeyer, CEO of Wells Fargo Asset Management.
Generally speaking, however, banks and insurance companies have not been able to compete for key staffers. “Talent has gone free agent, leaving banks and trust companies and insurance companies to pick among the minor leagues for players,” said Donald Putnam, San Francisco-based managing partner of investment bank Grail Partners.
Casey Quirk's Mr. Casey said banks and insurance companies need to connect the success of their money management employees with their compensation. “It's hard to keep together a group of people doing an activity that is different than the parent company's main business,” he said. “That is where the misalignment comes in.”
The advent of BlackRock
The biggest money management firm in the world, BlackRock (BLK), wasn't around when P&I launched. It was founded in 1988. The company, spun out from The Blackstone Group, has become the world's largest asset manager through a series of acquisitions pushed by CEO Laurence Fink. The 2009 acquisition of Barclays Global Investors pushed BlackRock to the top of the heap.
“If you want to talk about a real success story, it's BlackRock,” said Jeffrey Margolis, the New York-based managing director of Margolis/Kass Advisors, a consultant to money managers. “They were successful even before the string of acquisitions, and were able to grow both organically and non-organically.”
BlackRock's acquisitions also broadened the company's investment offerings to meet client's demands, said Rob Goldstein, executive vice-president and head of institutional business at the firm.
“There's been a lot of opportunities in the asset management business to just buy assets,” Mr. Goldstein said.
“So opposed to buying a capability, just buy assets where you already have a capability and grow your AUM, we haven't done any of those transactions.”
He said BlackRock's 2005 acquisition of State Street Research gave the firm real estate and specialized equity capabilities, followed by Merrill Lynch Investment Management, which offered global equity capabilities. Quellos Group LLC added alternatives, and BGI, which added passive investments, model-based and quantitative fixed income and exchange-traded funds.
“When you look at the acquisitions that we've done, every one of them has filled a vital gap that we had in terms of what our business needed to properly serve our client base,” he said.
Mr. Goldstein said at BlackRock's beginning, no one in company management could have ever imagined how large the company would grow in terms of AUM. He said becoming the biggest asset firm in the world occurred as “a consequence of the strategy as opposed to (being) the strategy” itself.
PIMCO, on the other hand, has grown to dominate the fixed-income world and become one of the world's largest money managers without acquisitions. PIMCO is owned global insurance giant Allianz SE, in Munich, Germany. Founded in 1971 and operated out of a garage, PIMCO today has around 2,500 employees.
Mr. Casey said PIMCO has been able to grow so big because of strong investment talent, but also because of Allianz's hands-off attitude.
“Allianz has been a real good owner of PIMCO,” he said. “They never messed with the PIMCO culture; they allowed these people to be professional investment people and operate a very professional business.”
The future of fixed income
Whether PIMCO and other firms where fixed-income assets dominate will be able to continue to grow is unclear, said Mr. Bobroff, noting an expected rotation out of fixed-income securities and into equities in coming years could hurt.
Douglas M. Hodge, PIMCO's chief operating officer, said company officials are convinced there is a clear role for fixed-income investments in the future. “There are advantages for bonds in a well-diversified portfolio,” he said. “They are sources of reliable income.”
He said the company will retain its strength in fixed income and will continue their push into other asset classes, including equities and alternatives. The latter make up around 1% each of the $1.6 trillion PIMCO had in assets as of Dec. 31, 2012.
For more from Mr. Hodge, see a video of him talking about changes in the investment management industry
Another factor contributing to success is a long-established international presence, said analyst Michael Kim, managing director of Sandler, O'Neill Partners LP, New York. “Clearly there are advantages to being first to market when you try to establish a presence in another market.”
Around 44% of BlackRock (BLK)'s worldwide assets under management are from clients based outside the U.S., compared to almost 40% for SSgA; 33%, J.P. Morgan; and slight above 20% for PIMCO, according to P&I data as of Dec. 31, 2012.
Richard F. LaCaille, global CIO of SSgA, said his firm and others were able to grow internationally in the 1990s as investors became more sophisticated worldwide and embraced investment strategies such as alternatives.
“The 1990s were the biggest decade of change for the money management industry,” Mr. LaCaillle said.
He still sees opportunities for smaller managers, noting the money management industry is fragmented and has a relatively low cost of entry.
But Vanguard's Mr. Bogle says there may be room for new entities, but added it's going to be difficult for anyone to grow as big as the largest firms today.
Mr. Casey said he expects the biggest money management firms to grow even bigger, but he sees hope for smaller firms with new investment ideas.
Firms that can produce strong investment results can also prosper, Mr. Casey said.
“There is always room for ingenuity and new ideas.”
This article originally appeared in the October 14, 2013 print issue as, "Managers' assets just keep growing".