The largest managers of defined contribution plan assets increased their market share significantly at the expense of smaller firms in 1994, and the trend seems likely to continue.
The largest 25 managers of defined contribution assets invested 72% of all of the defined contribution assets managed by firms profiled in Pensions & Investments' Investment Adviser Profiles issue, up from 66% last year.
And defined contribution plan assets now account for 25% of all tax-exempt assets managed by those firms, up from 16% in 1993.
Defined contribution plan assets managed by the top managers surged more than 45% in 1994 to $445 billion from $305 billion in 1994. However, some of this increase was because of improved reporting by State Street Bank and Trust, Aetna Life & Casualty and Prudential Asset Management Co. All had underreported last year.
Adjusted for the incorrect reporting last year, the defined contribution asset growth among the top managers was still an impressive 34%.
The figures reported in the money manager profiles show:
Defined benefit asset growth and total asset growth in 1994 was slow - less than 5% on a market-adjusted basis.
Poor investment results and very low or even negative cash flow from defined benefit plans largely offset the rapid growth of defined contribution plan assets.
The total tax-exempt assets of the 100 largest firms grew faster than the assets of other firms, showing that multiproduct and defined contribution plan managers are increasing their market share.
Employers seem to have succeeded in educating employees to put less of their defined contribution plan assets into guaranteed investment contracts and more into equities.
The dramatic growth in defined contribution assets provided the one bright spot during 1994 for those money managers large enough and diversified enough to take advantage of it. It helped make up for the investment management industry's slump in 1994.
The tax-exempt discretionary assets under management among the Top 500 money managers grew only 2.1% in 1994, to $3.118 trillion from $3.054 trillion, according to data from P&I's annual directory.
Despite a sharp upswing in the growth of defined contribution plan assets, tax-exempt discretionary assets under management among all 824 managers surveyed grew only 2% to $3.149 trillion, from $3.086 trillion in 1993. Assets under management among the Top 100 investment managers increased 4.9% to $2.36 trillion in 1994 from $2.249 trillion in 1993.
Poor investment returns last year were a factor in the slow growth rate, particularly on the fixed-income side, said Drew Dimakis, director of consulting at RogersCasey, Darien, Conn. Negative investment returns shrank the asset pools despite the sponsors' contributions, he said.
"Your average pension fund probably had flat or slightly negative investment results and the positive cash flow from 401(k) plans, while big, barely canceled the negative results," said Phil Maisano, president of Evaluation Associates, Norwalk, Conn.
On a market-adjusted basis, assets among Top 100 managers were up 4.5% and assets for all managers were up 1.6%. By comparison, 1993 assets among the Top 100 were up 4.4% on a market-adjusted basis and assets for all managers, 5.4%.
Two contradictory trends are at play in money managers' asset growth, said James Angelone, principal with Buck Consultants Inc. New York. Defined contribution assets are growing, but the main beneficiaries of that growth are the large multiproduct firms that are still adding assets at a fast clip and boosting totals for the Top 100 firms. On the other hand, the totals are skewed lower by small, single-product shops that cater to the defined benefit market and don't benefit from the automatic employee contributions made to 401(k) plans.
"Smaller managers are not managing the 401(k) assets. The smaller managers are running defined benefit plans and don't have the annuity of participants putting in 15% of their assets every year," said Mr. Angelone. "Your DC assets are growing faster than DB (assets). The largest multiproduct firms are getting more of the DC assets and are growing faster than the smaller, primarily DB shops."
Data for P&I's survey is collected as of Jan. 1 each year, reflecting growth in the prior calendar year. A benchmark portfolio return of 0.45% was calculated using market indexes weighted to the average 1994 allocations for the Top 500 managers. The weightings include 52% for the Standard & Poor's 500 Stock Index, 32% for the Salomon Brothers Broad Bond Index, 6% for the Russell-NCREIF Property Index, 2% for the Lehman Brothers Mortgage Index and 8% for 90-day Treasury bills. The S&P 500 returned 1.32% for calendar year 1994; the Salomon Broad Index returned -2.85%; NCREIF, 6.7%; the Lehman Brothers Mortgage Index, -1.61%; and 90-day Treasuries, 3.85%.
The booming growth rate of the 401(k) and 457 plan market resumed its rapid pace in 1994 after a lull in 1993. Assets among the top 25 401(k)/457 managers grew 45.9% to $445.157 billion in 1994, up from $305.1 billion a year earlier. Total 401(k) assets among all managers surveyed increased 50% to $617.363 billion in 1994, up from $411.140 billion in 1993.
"The 401(k) market continued to be the place to play," said Mr. Maisano. He noted new plan formation rises along with new business formation, and the U.S. economy has seen a period of strong new business formation recently.
"It's basically the only tax shelter left," he said.
Insurance companies made a comeback of sorts in the defined contribution market against the mutual fund companies and banks. Many insurance companies have caught up by moving away from depending on traditional guaranteed investment products to sell more mutual funds for 401(k) plans, said Mr. Maisano.
The top tier of 401(k) plan specialists had been changing dramatically in the past five years, with an abrupt shift from insurance company managers and to mutual fund giants. Two insurance companies, Aetna Life & Casualty Co., Hartford, Conn., and Prudential Insurance Co. of America, Short Hills, N.J. - neither of which appeared in 1993's top 25 - jumped to fifth and sixth place, respectively. They edged out Wells Fargo Nikko Investment Advisors, San Francisco,, despite its growth to $20.1 billion in 1994 from $15 billion in 1993. These shifts, however, are due in part to poor reporting of the data. Insurers in the past have had problems breaking out their 401(k) assets for this survey.
While Fidelity Investments, Boston, and Bankers Trust Co., New York, continue to monopolize the top ranks of 401(k) plan managers, State Street Bank & Trust Co., Boston, leapfrogged to third place from 15th place, edging The Vanguard Group of Investment Cos., Valley Forge, Pa. State Street jumped from $8.125 billion in 401(k) assets in 1993 to $29.435 billion in 1994. A State Street employee attributed the jump to an increased effort in the defined contribution arena as well as improved reporting by the company this year.
"State Street is among those firms that are offering a bundled product and the investment in the technology that is so paramount and a driving force in the DC marketplace. Those guys have come very far in putting together a well-oiled machine," said Mr. Angelone.
Fidelity and Bankers Trust showed double-digit growth to hold onto the top spots, although the growth rates slowed in 1994. Fidelity's 401(k)/457 assets grew 27.9% and Bankers Trust's, 39%, compared to respective growth rates of 54.2% and 51.8% in 1993. INVESCO North America, Atlanta, which had showed a phenomenal asset growth rate of 61.3% in 1993, stalled in 1994, barely holding at $15.475 billion in 401(k) assets, compared with $15.463 billion in 1993.
Plan sponsors' education efforts seem to be succeeding in moving participants to investment in equity and bond funds at the expense of insurance company guaranteed funds. As a result, GIC assets under management among the top 25 providers dropped again in 1994 to $133.869 billion from $134.192 billion in 1993 and $134.604 billion in 1992.
Overall, bank and insurance companies continued to gain assets at the expense of investment counselors. While insurance companies increased their total tax-exempt assets under management to $761 billion in 1994 from $698 billion in 1993 and banking institutions boosted assets to $1.135 trillion from $1.102 trillion, independent managers dropped to $1.252 trillion in assets from $1.286 trillion.
Some of the asset growth in dollar terms is due to the continuing consolidation in the industry, where several banks bought money management organizations, including Zurich-based Swiss Bank Corp.'s acquisition of Brinson Partners Inc., Chicago, and Northern Trust Corp.'s purchase of RCB International Inc.
"Whether it's Northern Trust or whoever, there's a lot more consolidation of the business occurring. The fastest way to get in the business is to buy another firm," said Mr. Angelone.
As a percentage of assets under management, investment counselors lost market share, dropping to 30.2% of Top 100 managers' assets and 39.2% of the Top 500 in 1994 from respective figures of 31.7% and 40.5% in 1993.
Insurance companies rose among the Top 100 - at 28.4% in 1994 vs. 26.6% in 1993 - and the Top 500 - at 24.4% from 23.4%. Banks held fairly steady, with a 41.4% market share among the Top 100 and 36.4% of the Top 500 in 1994 compared with 41.7% and 36.1%, respectively, in 1993. Banks had been increasing their share of assets under management, to 33% in 1992 from 27% of assets among the Top 500 in 1991 and to 37% in 1992 from 29% in 1991 among the Top 100.
Thanks to the growing interest in active management among sponsors, indexed assets dropped across the board in both equity and fixed income. Assets among the top 25 equity indexers were down 17.5%, while assets of the top 25 bond indexers dropped 11.7%. One notable exception was State Street Bank & Trust, which actually increased its indexed equity assets to $32.187 billion in 1994 from $28.58 billion in 1993. (The State Street profile and the top 25 equity indexers chart show an incorrect number that was caught after the page had gone to press.)
Only international equity and bond indexing showed increases among indexed assets. International equity indexing increased 9.45% on a market-adjusted basis and, despite a bad year for fixed income, international bond indexing increased 112.5%.
The drop in overall indexing could reverse itself next year, said Mr. Maisano. While active management had outperformed indexes by a wide margin in previous years, spurring the move to active management, the indexes' performance is outpacing active management so far in 1995.
"It's almost predictable that, if the margin between active management and indexing holds this year, you will see some rise in indexing next year," he said.
Wells Fargo Nikko Investment Advisors was the top domestic equity indexer for the fourth year in a row, but its assets dropped to $66.810 billion from $91.842 billion in 1993. The reason is that much of the money in Wells' tactical asset allocation accounts, while in indexed vehicles, are switched frequently among asset classes, and thus are classified as "active" in nature by the firm.
Bankers Trust, which had been emphasizing its active equity management over indexing, was down to $60.075 billion in 1994 from $66.262 billion in 1993.
Total international assets under management rose sharply to $272.229 billion in 1994 from $248.486 billion in 1993. International equity rose to $216.037 billion in 1994 from $189.393 billion in 1993, while international fixed-income assets dropped slightly to $55.446 billion from $56 billion and cash dropped to $1.189 billion from $3.1 billion.
A portion of the increases were due to market returns, thanks to an 8.06% return on the Morgan Stanley Capital International Europe Australasia and Far East Index and -1.94% return on the Salomon World Bond Index. On a market-adjusted basis, international equity assets increased 6%, while international fixed-income increased only 1% by comparison.