Size continues to be an important factor in the growth of investment management firms, according to Pensions & Investments' New Business Scoreboard.
Large, multiproduct firms - particularly those that offer a full menu of mutual funds for defined contribution plans - continued to add assets at a rapid clip in 1996, according to P&I's tally of new institutional assets.
The top five managers with more than $10 billion in overall assets added net new assets of $89.8 billion, an increase from 1995's $66.9 billion gain. Overall, the top 10 managers in that category added $121 billion in new assets in 1996.
State Street Global Advisors, Boston, was the top gainer again in 1996, adding $28.4 billion, a growth rate of 18.9%. A large part of the gains came in international/global assets, where State Street added $11.7 billion, making it the top gainer for that asset class among firms its size.
Barclays Global Investors more than doubled its asset gains, bringing in $24 billion in new assets, compared with a $10.2 billion gain in 1995 and $6 billion in 1994. Barclays, whose gains translated to a growth rate of 12.7%, was among the top 10 gainers of its size for most asset classes. It also was the top gainer in indexed assets and the top gainer in domestic balanced business, with $1.2 billion in new assets.
The firm, the former Wells Fargo Nikko Investment Advisors, experienced a drastic growth spurt even before WFNIA was acquired by Barclays PLC in 1995, but its dominance in the market was confirmed recently with a sweeping reorganization that elevated the U.S. staff to power over the British bank's investment management operations worldwide (P&I, Feb. 3).
Fidelity Investments, Boston, reported the third largest asset gains among firms its size, bringing in $16.8 billion in 1996, compared with $20.3 billion in 1995, when it placed second. Despite setbacks in 1996, Fidelity retained its spot as the top gainer in domestic equity assets, with $14.8 billion compared with $12.3 billion in 1995.
Size can be a self-fulfilling prophecy because it helps firms use economies of scale to drop fees and attract clients, said Scott Lummer, managing director of Ibbotson Associates, Chicago. A large firm can enter a cycle of attracting a larger share of clients the larger it gets, he said.
"It's a heavy referral business. The more clients you have, the more referrals you'll get," he said. "Also, the more clients you have, the cheaper you will be, so the more clients you'll get."
Defined contribution plans are going to go with big firms because of their reputation, relative stability and pricing advantages, said Mr. Lummer.
"When you look at Vanguard and Fidelity and T. Rowe Price and State Street (Global) you say 'these are four pretty good companies'. . . they're almost a 'too big to fail' type of issue," he said.
T. Rowe Price Associates, Baltimore, also landed in the top ten, moving to seventh place from ninth in 1995.
The two newcomers to the top 10 gainers - State Street Research & Management Co. and Putnam Investments, both in Boston - took different routes. Putnam placed eighth overall with $5.8 billion, mainly on the strength of $4.5 billion in new domestic assets. State Street Research, on the other hand, came in sixth overall thanks to $9.9 billion in new domestic fixed-income assets, which also placed it first in its group for that asset class.
State Street Research benefited from a decision by its parent company, Metropolitan Life Insurance Co., to consolidate asset management subsidiaries under the State Street Research banner. In early 1996, the insurer merged some of its investment management entities, starting with MetLife Investment Management Co. (MIMCO), said Ralph Verni, president and chief executive officer of State Street Research. All investment management units have been put under Mr. Verni's oversight and are developing identities linking the State Street Research name.
Approximately $7 billion of the $9.9 billion in State Street Research's new fixed-income assets came from more than 40 new accounts involved in the MIMCO consolidation, said Mr. Verni. All told, State Street Research has gone from $30 billion at the start of 1996 to about $43 billion currently, thanks to MIMCO's assets, new clients and market appreciation, he said.
Two other subsidiaries, Global Funds Management, an international equity and fixed-income shop based in London, and Met Life's real estate group, made up of two realty subsidiaries, will be merged later. GFM, which manages approximately $1.3 billion in international equity and fixed income, will be merged in the next month, said Mr. Verni. The fixed-income side will be merged with State Street Research's existing fixed-income department, while the equity staffers will become an international equity team within the firm; both teams will remain in London.
The real estate unit will be made up of the assets of Met Life Realty Group and Metric Real Estate, a real estate manager acquired in the late 1980s; the two will be brought together in late March or early April, said Mr. Verni. The resulting subsidiary, which will manage proximately $3 billion altogether, will remain a separate business entity but operate alongside State Street Research under a name that associates the two firms, he said.
The gains for Putnam were roughly equally divided between defined benefit and defined contribution assets, said Thomas J. Lucey, Putnam's chief of institutional management. The company benefited from good performance in a variety of equity products and strong visibility, he said.
Thanks to the trend toward multiple mandates among sponsors, Putnam has been able to cross-sell successfully on the defined benefit side and increased its bundled business among defined contribution plans, said Mr. Lucey.
He noted 30% of the 115 defined benefit searches Putnam was selected in during 1996 were among existing clients. On the defined contribution side, Mr. Lucey said Putnam is "a relative newcomer in the land of the bundled provider" but noted the company won approximately 100 new defined contribution mandates - 60 full-service relationships and 40 investment-only mandates.
The top 10 gainers in international/global business among the managers with more than $10 billion racked up $32.6 billion in new assets, compared with a gain of $26.1 billion in 1995. State Street Global was first with $11.7 billion, followed by Barclays Global with $6.7 billion and Capital Guardian Trust Co., Los Angeles, with $3.7 billion.
Indexing was very good to many top players. The top three indexers - an identical group from last year - gained $43.3 billion in assets, compared with $27.4 billion in 1995. Predictably, equity indexing continued to far outweigh fixed income, with the top 10 index gainers bringing in $51.2 billion in new equity assets, compared with $7.1 billion in fixed income.
Among indexers, Barclays Global Investors more than doubled its 1995 growth with $22.9 billion in new assets vs. $9.2 billion in 1995. Last year's top index gainer, State Street Global, added $14.2 billion in new assets, slightly lower than 1995's $15.3 billion gain. Vanguard Group, Valley Forge, Pa., was third again, with $6.2 billion in new assets, doubling its $2.9 billion gain of 1995. They were followed by Bankers Trust Co., with $3.8 billion in new assets; Dimensional Fund Advisors, with $3.3 billion; and Fidelity, with $2.7 billion.
Vanguard had a very good year in 1996, bringing in $11.5 billion in new assets, up from $6.4 billion in 1995. The firm rose to fourth place overall in 1996 from seventh in 1995, and landed among the top 10 gainers for most categories, and doubled its rate of gains in most.
It was "a combination of discipline and investment style and being the right kinds of funds in the right market," said William McNabb, senior vice president in charge of Vanguard's institutional business. Several of its flagship funds are large-capitalization, value-oriented offerings that were among the few core funds to outperform the Standard & Poor's 500 Index in 1996, so the market's turn toward that strategy served them well, he said.
"With the turmoil in fund performance (in 1996), the fact that our funds did what they were supposed to do was very appealing," he said.
Vanguard also remained disciplined in protecting its reputation for service among bundled defined contribution service providers, which also helped, said Mr. McNabb. While the defined contribution business has grown, Vanguard has tried to only make promises it can keep in its record-keeping and communication services, he said.
"In the previous two or three years we occasionally felt we were missing opportunities because we were being very disciplined in what we did .*.*. but people kept coming back to us and saying 'you were right,'*" he said.
Equities - and indexed equities in particular - were good to Vanguard, which doubled its gains in both categories in 1996. It gained $6.7 billion in domestic equity, up from $3.1 billion in 1995, and $6.2 billion in indexed assets, up from $2.9 billion. Among its indexed assets, it gained $5.6 billion in equities and $623 million in fixed income, compared with $2.6 billion in equities and $312 million in fixed income in 1995.
Vanguard always has been successful in indexing among defined benefit plans, but 1996 was a year when indexing also became much more prominent in the defined contribution area, where Vanguard gets approximately 75% of its institutional assets, said Mr. McNabb.
"Last year in particular was a real acknowledgement in the defined contribution market that indexing could play a significant role. We had a significant number of new clients who came to us for that particular expertise."
The only asset class in which Vanguard did not place among the top 10 gainers was international/global, which Mr. McNabb said is a result of Vanguard sticking to its strategy. The company has two international equity funds, one each growth- and value-oriented, and a relatively new global equity fund with a track record too short to attract institutions yet.
Vanguard has not aggressively pursued international or global mandates because not much defined contribution money flows into those funds. Vanguard wants to offer the international option for its bundled clients, but having a wide selection is not the main priority, he said.
Vanguard also was the top gainer in manager-of-managers assets, with $3 billion, followed by the Clifton Group Investment Management Co., Minneapolis, with $2.9 billion, and State Street Global, with $945 million in new assets. The top 10 gainers brought in $7.8 billion, compared with $5.9 billion in 1995.
Among firms with $1 billion to $10 billion in assets, age was a not a problem in asset gathering, but familiarity was a strong factor. New or still relatively new firms - less than three years in business - started by teams of managers from established firms gathered assets at a fast clip.
The top 10 gainers among firms that size included Oaktree Capital Management, Los Angeles, the firm created in 1995 by a team from TCW Asset Management Co.; Boston Partners Asset Management L.P., Boston, started in 1995 by alumni of Boston Co. Asset Management Co.; and Schneider Capital Management, Wayne, Pa., founded in December by former Wellington Management Co. Senior Vice President Arnold Schneider. Oaktree added $2 billion in assets, Schneider $1.4 billion and Boston Partners $1 billion.
But legal problems have followed some of the new firms. A group of Wellington partners sued Mr. Schneider for allegedly breaching a non-compete clause in his partnership agreement and his fiduciary duty, Boston Partners' founders were sued by their former firm before settling and TCW did a hard sell to keep clients from defecting to Oaktree.
But despite the problems, sponsors seem comfortable about following portfolio managers to new firms if they like them.
Sponsors understand the incentives for successful money managers to blaze their own trails and, if left with the choice, they will go with the managers, said Ibbotson's Mr. Lummer.
"They don't necessarily build a huge comfort level with the firm, they build the comfort level with the individuals," he said. "Investment is such a matter of trust and faith that you buy the people. If the people leave, your tie to that old company is not so strong."
The top gainer in the $1 billion to $10 billion group was an established firm. BlackRock Financial Management, New York, reported $3.9 billion in new assets, a growth rate of 69%. The gains were all domestic fixed income, which also placed it first among fixed-income gainers its size. Bank of America was second in both categories, with a total gain of $2.8 billion, including $1.8 billion in fixed income; it grew by an overall rate of 39%. Overall, the top 10 gainers in that size range brought in $17.9 billion in 1996.
Pension plans' continuing efforts to shift assets away from guaranteed investment contracts appear to be having an effect, and GIC portfolio managers attracted far fewer assets than in previous years. The top five reaped only $2.2 billion in assets, compared with $6.9 billion in 1995. INVESCO North America, Atlanta, was the top gainer with $908 million, compared with $1.4 billion in 1995. American Express Institutional Services, Minneapolis, was second with $540 million, compared with $1.7 billion in 1995. State Street was third with $316 million, followed by Certus Asset Advisors and Putnam Investments with $272 million and $200 million, respectively.
This is not a surprising turn of events, said Mr. Lummer. On one hand, GICs don't have a real long-term advantage in the capital markets, so defined benefit plans have been avoiding them. On the other hand, participants in defined contribution plans are becoming more sophisticated thanks to more educational efforts and are beginning to realize the disadvantages of GICs vs. other investments, he said.
In the real estate field, midsized firms had a great year attracting assets and outpaced their larger competitors in generating business. The top 10 gainers among managers with more than $10 billion brought in $2.3 billion in new real estate assets, while the top 10 among firms $10 billion to $1 billion in size brought in $3.8 billion. Equitable Real Estate Investment Management Inc. was again the top gainer among the large real estate firms, with $810 million in new assets, and RREEF Funds repeated as the top gainer among the midsized firms, with $870 million.
Real estate is one exception to the "bigger is better" rule for attracting assets, said Mr. Lummer. Specialization cancels any economies of scale that can be achieved with size and also cancels the advantages of size in marketing, he said.
Unlike traditional investments, where assets can be added with a minimal increase of effort, managing larger portions of real estate requires an increased analytical workload, he said. And like venture capital and private equity, it can kill its returns by sending too much money after too few deals, so it's not surprising that midsized firms can attract more investor interest than large ones, said Mr. Lummer.
