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Special report

Money manager assets gain 9% on post-election bounce

Performance, fee pressure and move to passive strategies mark rebound year

Mortimer Buckley
Mortimer Buckley said Vanguard benefited from trends favoring both passive investing and target-date funds.

An equity market bump after the election of President Donald Trump helped increase money manager assets in 2016.

Worldwide institutional assets of the largest 500 firms in Pensions & Investments annual money manager survey increased 9.2% in 2016 from the previous year to $39.46 trillion.

The year had a “rocky start” in equity markets, said investment management consultant Neil Rue, a managing director with Pension Consulting Alliance, Portland, Ore. “The beginning of January 2016 was one of the worst equity market experiences in history,” he said. And after January, the market stagnated. “Things were languishing right up until the election, and then you got a strong bump in the equity markets as a result of the election,” said Mr. Rue. “It was a very nice snapback.”

The Standard & Poor's 500 returned 3.88% through Nov. 4, but closed the year up 11.96%.

The increase in worldwide institutional assets among the managers in P&I's universe follows a sluggish 2015, when volatile markets and declining oil prices reduced institutional assets by 2.8%. “Part of 2016 was just recovery,” Mr. Rue said.

Overall, worldwide assets of the 583 managers responding to P&I's survey rose 9.1% to $58.77 trillion in 2016. Worldwide institutional assets rose 9.2% among that universe, to $39.48 trillion.

U.S. institutional tax-exempt assets overall rose 7.5% to $15.2 trillion, while internally managed U.S. institutional tax-exempt assets rose $7.7% to $13.69 trillion.

There was little change in the ranking of the top 10 money managers ranked by worldwide institutional assets under management. Wellington Management and J.P. Morgan Asset & Wealth Management switched places, with Wellington moving into seventh and J.P. Morgan slipping to eighth. ( Amundi, which ranked 10th, did not complete a survey for the 2015 ranking.)

Market performance wasn't the only major theme in asset management in 2016. Outflows from active managers continued, often benefiting firms offering passive strategies and exchange-traded funds. Fees also were a big issue.

“Fees are becoming such an important focus, investors are reviewing the value of what they are paying for,” said Phillip Nelson, principal and director of asset allocation at investment consulting firm NEPC LLC in Boston.

BlackRock still on top

BlackRock (BLK) Inc. (BLK) retained its title as the world's largest asset manager, reaching $3.29 trillion in worldwide institutional assets in 2016, a 10.3% increase from 2015. Edwin Conway, a New York-based managing director and global head of BlackRock's institutional client business, said the firm saw strong inflows into indexing strategies and exchange-traded funds.

“As a result of the shortfall in returns from the traditional asset classes, (clients are) coming to us for efficient market beta, through our iShares (ETF business) and indexing,” Mr. Conway said.

BlackRock reported double-digit increases in AUM for sponsored ETFs, passive global equities and passive domestic fixed income. BlackRock also saw strong inflows into active alternative strategies — including risk parity, infrastructure, real estate and private equity, he said.

The nature of the business is changing, Mr. Conway noted. The firm in 2016 continued to see strong demand from clients for a more consultative approach to their investments, one in which BlackRock helps with overall portfolio allocation, instead of being hired for a specific strategy.

The old way of doing things — selling a specific investment strategy — isn't working for clients who are trying to solve bigger investment problems, he said. “They (clients) have clearly had enough of the self-interested product-pushing that they've experienced in the past.”

Vanguard Group Inc. was second in the ranking by worldwide institutional assets, but reported the largest growth among the top 10 managers. Vanguard reported $2.39 trillion as of Dec. 31, a 21.4% increase from the end of 2015. The firm saw a record $305 billion in net inflows in 2016, said Mortimer Buckley, chief investment officer based in Malvern, Pa.

The continued trend toward low-cost investing helped spur growth in 2016 in both ETFs and index funds, Mr. Buckley said. Another major investment category in which Vanguard saw sizable inflows in 2016 was target-date funds, he said. “We are benefiting from a tailwind in two major categories,” Mr. Buckley said.

He said the rise in passive investing coincides with the fact that more money today is being managed professionally. That competition among skilled professionals, along with easy access to financial data, makes it more difficult to find alpha.

Growth from mergers

Among the 25 largest managers of worldwide institutional assets, Asset Management One showed the largest percentage growth for 2016, up 211% to $382.5 billion under management to rank No. 25. Formerly known as DIAM Co., the Tokyo-based firm's boost came from a merger of four asset management units of Mizuho Financial Group and Dai-ichi Life Insurance Co.

Among the top 25 managers of U.S. institutional tax-exempt assets, the firm with one of the biggest percentage increases was Principal Global Investors. The subsidiary of Principal Financial Group, Des Moines, Iowa, saw a 24.4% increase in the amount of assets it managed to $218.4 billion. Principal Global Investors CEO James McCaughan attributed about half the increase to market performance and the other half to inflows, primarily into Principal's defined contribution business and particularly target-date funds.

“Having a long-established DC business has worked well for us over the last few years,” he said, adding that long-term positive performance managing DC assets gives Principal an advantage over firms that have entered the market more recently.

Principal's U.S. defined contribution plan assets rose 9.8% to $94.2 billion at year-end 2016 from the year-earlier date.

P&I's survey findings highlighted the continuing shift by U.S. institutional tax-exempt investors to passive strategies. Passive domestic equity assets totaled $2.15 trillion at year-end 2016, up 12.4%, while active domestic equity assets totaled $2.33 trillion, eking out a 0.6% gain, even including market gains. (P&I's data on individual strategies and styles is based on managers' U.S. institutional tax-exempt assets under internal management.)

The increase in passive investing is likely to continue in coming years, said Bradley Morrow, Willis Towers Watson PLC's head of research for the Americas, based in New York. “I would expect that it would continue,” Mr. Morrow said. “It is very difficult to outperform the market, and more investors are looking at ways to get the market exposure as cheap as they can.”

The shift toward passive equity investing went past the domestic category. P&I data show passive global equity strategies increased 28.5%, to $314 billion.

Hedge fund decline

One previously hot asset category that saw an overall decline in assets in 2016 was hedge funds. Money managers responding to the P&I survey reported worldwide hedge fund assets of $783.8 billion in 2016, down 2.2% from 2015. But mirroring the trend of recent years, direct hedge fund investments saw a 5.6% increase to $520.9 billion while funds of funds assets dropped 14.6% to $262.9 billion.

“The weaker performance combined with the relatively high fees have definitely created a trend out of hedge funds,” said Atlanta-based consultant Jay Love, U.S. director of strategic research for Mercer Investment Consulting.

Mr. Love said most of the outflows have been in hedge funds of funds because of the multiple fee levels. “We are seeing more and more fund-of-funds managers drop incentive fees,” he said. “The flat fee portion is dropping to under 1% in a number of cases.”

Among other findings in P&I's survey:

  • Worldwide assets in managers' investment outsourcing programs rose 18.2%, to $1.1 trillion.
  • Factor-based investment strategies totaled $1.4 trillion. The largest manager of factor strategies in P&I's survey was Dimensional Fund Advisors, Austin, Texas, with $452.8 billion in assets. This was the first year P&I included a question on worldwide assets in factor-based strategies.
  • Assets managed with an environmental-social-governance focus totaled $3.9 trillion, with Prudential Financial Inc. leading the ranking at $733.6 billion. The year-end 2016 survey was the first time P&I has asked managers about worldwide assets managed under ESG principles.
  • Real estate equity strategies totaled $381.7 billion at Dec. 31, down 1.2% from the previous year.
  • Infrastructure assets managed by money management firms reached $19.7 billion, up 8.8%.
  • The managers responding included 56 woman- and minority-owned firms.

This article originally appeared in the May 29, 2017 print issue as, "Assets gain 9% on post-election bounce".