The number of large corporate pension funds hiring money managers plunged during the past four years, new data from Greenwich Associates show.
Industry experts interviewed by Pensions & Investments say a natural slowdown in manager hirings for once-new asset classes, interest in indexing and pension fund executives' desire to trim manager stables contributed to the decline.
In the year ended October 1996, 53% of large corporate funds hired money managers - down from 67% four years earlier, according to Greenwich's survey of 1,609 funds.
Overall, 42% of institutional investors - including corporate and public funds and endowments - hired new managers last year vs. 46% four years earlier.
Terminations of managers by corporate funds were almost unchanged in the period - 49% vs. 52% four years earlier.
Terminations by institutional investors overall increased to 34% in 1996 from 30% four years earlier.
Rodger F. Smith, a partner with Greenwich Associates, Greenwich, Conn., said the statistics show that "funds continue to hire quite actively and are aggressively terminating managers."
Ronald Peyton, president and chief executive officer of Callan Associates, San Francisco, and others believe the high level of hirings four years ago might have been unsustainable. At the time, many pension funds sought money managers for newer areas, such as foreign investments and U.S. small-cap stocks. But once managers were tapped, the hiring pace naturally eased, Mr. Peyton said.
But some factors at work these days - including more attention to indexing and a desire to limit a fund's roster of managers - may further shrink opportunities, especially for active domestic equity managers.
Market factors also may not be favoring these managers, Mr. Peyton suggested. These days, he said, "funds are not making new commitments to equities - which is where the demand is for multiple managers."
Larry Zielinski, executive vice president of Evaluation Associates Inc., Norwalk, Conn., said his firm's pension fund clients can't help but notice that domestic stock index fund returns have outpaced those of many active managers.
The growing interest in indexing by large pension funds has been quantified by Richard M. Ennis, principal at Ennis, Knupp & Associates, Chicago.
Using profiles of the largest 200 funds published annually by P&I, Mr. Ennis found 62% of the top 200 pension funds reported using index funds as part of their domestic equity allocation as of Sept. 30, 1996. A year earlier, that number was 56%.
The funds collectively indexed 36% of their domestic equity assets as of Sept. 30, 1996, vs. 30% a year earlier, according to Mr. Ennis' research, which will be published in an upcoming issue of Financial Analysts Journal.
Mr. Ennis found no trend toward large pension funds reducing the number of active equity managers. But that situation could change. With "significant amounts of money moving to index funds, plan sponsors in the long run will need fewer active managers," said Mr. Ennis. That trend "hasn't begun to show up in statistics . . . but we would expect terminations to pick up."
Added Mr. Zielinski of Evaluation Associates: "There should continue to more interest both in downsizing of manager rosters and in indexing, especially by large funds." That, he said, "could limit the opportunities for active managers."
However, Greenwich's data show that indexing's appeal may have peaked for now. According to Mr. Smith, Greenwich's last survey showed an increase in assets investing in index funds. But "most funds said their percent in indexing is (now) where they want it, and in the next three years, they don't see the need to increase it, for either domestic or foreign stocks," said Mr. Smith.
Still, evidence shows money managers and pension sponsors alike are very much focusing on these issues.
Russell Kamp, managing director, Chancellor LGT Asset Management, New York, sees a general trend toward funds seeking good managers with multiple capabilities.
This becomes "exacerbated in corporate merger situations where companies are bringing together very mature plans." In these cases, "they need to make harsh decisions about money managers. They certainly are not hiring, and they are doing a lot of terminations."
Where possible, they try to use existing managers for more than one type of asset class, Mr. Kamp said. Chancellor LGT manages more than $62.4 billion.
And pension executives cite an interest in limiting their manager ranks.
Richard Rose, chief investment officer of the $3 billion San Diego County Employees' Retirement Association, said the fund has 35 money managers and wants fewer - although it has no general reduction target.
Because "multiple relationships take more time to manage," the $1.4 billion Massachusetts Bay Transportation Authority Retirement Fund, Boston, is "looking at managers with multiple capabilities," said Executive Director John J. Gallahue. The fund now has 31 managers. "Where we can, we will combine different asset classes under one roof. It's an ongoing process that occurs as opportunities arise," he said.
The approximately $1 billion pension fund of The Times Mirror Co., Los Angeles, terminated two unnamed underperforming active equity managers, one for U.S. stocks, the other for global equities. Times Mirror simultaneously hired State Street Global Advisors, Boston, for a passive S&P 500 index portfolio, said Rajender K. Chandhok, assistant treasurer-pension and investments.
In another change, Times Mirror modified the mandates of its two global balanced managers, J.P. Morgan Investment Management, New York and Capital Guardian Trust Co., Los Angeles. Modifications, which were not described, were consistent with the fund's overall asset allocation changes at year end.
The fund has been reducing its manager roster for a few years, terminating some firms and giving multiple assignments to others.