Defined contribution plans continued to fuel growth among large institutional money managers, whose top ranks are increasingly dominated by large, multiproduct firms driven by mutual funds.
Overall, U.S. institutional tax-exempt assets under management rose 39.8% to $5.811 trillion from $4.156 trillion, according to data from Pensions & Investments' annual directory of investment advisers. The U.S. institutional tax-exempt assets among the top 500 money managers grew 40% in 1996, to $5.765 trillion from $4.116 trillion, and assets among the top 100 rose 42.2%, to $4.495 trillion from $3.161 trillion. This year's survey had 791 firms responding compared with last year's 774.
Once adjusted to factor in investment returns, tax-exempt assets among all managers were up 22.2%; among the top 500 managers, 22.7%; and the top 100, 24.6%. That market-adjusted growth is an improvement from 1995, when assets were up 4.4% on a market-adjusted basis for all managers, 5.9% for the top 500 and 6% among the top 100.
There are some segments in the industry where concentration is causing some recurring winners, said Stephen L. Nesbitt, senior vice president at Wilshire Associates Inc., Santa Monica, Calif.
In the defined contribution arena, economies of scale are favoring large players that have made significant investments in their products, while the growing interest in indexing favors behemoths such as State Street Global Advisors, Barclays Global Investors and Bankers Trust Co., which "have the market pretty much locked up," he said.
Among active managers, size also helps propel the top players in fixed income, because it gives them an advantage in functions such as credit research. The fixed-income area has stability and concentration among players such as PIMCO Advisors L.P., Loomis, Sayles & Co. Inc. and BlackRock Financial Management; but he added that in active international and domestic equity, "yesterday's winners are not necessarily today's winners."
Data for P&I's survey is collected as of Jan. 1 each year, reflecting growth in the prior calendar year. Market adjusted returns were calculated using a benchmark portfolio weighted to the average 1996 allocations for the managers. The weightings are 52.3% for stocks; 31.1% for bonds; 2.5% for real estate; 5% for mortgages; and 9.1% for cash.
The Standard & Poor's 500 Stock Index returned 22.96% for the year ended Dec. 31; the Salomon Brothers Broad Bond Index, 3.63%; the NCREIF Property Index, 9.64%; the Lehman Brothers Mortgage Index, 5.36%; and 90-day Treasuries, 5.27%.
The booming growth rate of defined contribution plans continued its rapid pace in 1996. Assets in defined contribution plans including 401(k), 457 and profit-sharing plans rose 24.9% to $1.314 trillion from $1.052 trillion in 1995
Assets among the top 25 defined contribution managers totaled $902 billion as of Jan. 1, 1997, 16.1% higher than the top 25's $776.7 billion as of Jan. 1, 1996.
The reasons for the continuing defined contribution surge are three-fold, said Scott Lummer, managing director of Ibbotson Associates, Chicago. More defined contribution plans are being created, more investors are choosing to participate and the participants are making larger contributions, he said.
"When you think about the '80s as the time when a lot of the DB plans were terminated and a lot of the DC plans started, now you're 10 years later and those plans are getting into a critical mass," said John W. Ehrhardt, consulting actuary at Milliman & Robertson Inc., New York, which started a pension consulting practice this year.
Education is starting to sink in, and participants are putting more money into equities and other securities and less into stable value products than they used to, said Mr. Ehrhardt.
"The baby boomers are finally waking up a bit," he said.
The top 10 defined contribution managers are virtually the same group as last year's, with some minor shuffling among the players. The largest manager of defined contribution assets was the Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, which managed $185.3 billion in defined contribution assets. Beyond TIAA-CREF, the field continued to be dominated by parents of the large mutual fund complexes such as Fidelity Investments, Boston, and Vanguard Group Inc., Valley Forge, Pa.
Top rankings steady
A similar situation happened among the top 10 managers overall of tax-exempt assets, who were the same 10 firms as in last year's rankings. A growth spurt pushed Barclays to the top spot with $254.779 billion, squeaking ahead of State Street, which had $254.107 billion. Those rankings were reversed in 1995, when State Street had $198.151 billion, with Barclays at $195.694 billion.
Large, multiproduct firms have become entrenched in the top tier of the industry, and half of the top 10 didn't even budge from last year's rankings, despite surging assets. TIAA-CREF was third with $185.33 billion, Fidelity Investments, fourth with $173.8 billion, and Bankers Trust was fifth with $149.115 billion; all were in the same spots in 1995.
Fidelity also was the top mutual fund manager, with $455.5 billion in assets under management, while Merrill Lynch Asset Management, New York, came in second with $191.5 billion and Capital Research & Management Co., Los Angeles, followed with $190.8 billion. All three firms were in the same positions in the previous survey list. The top 25 mutual fund managers handled a total of $2.213 trillion assets as of Jan. 1, 1997, up 25% from $1.769 trillion a year earlier.
The growth in indexed assets leveled off during 1996, after a spike in 1995. While growth in completely passive domestic assets was flat, domestic enhanced indexing and international equity indexing saw some sharp gains that consultants attributed mainly to increased interest among defined contribution plan participants who noticed how the indexes beat most active management strategies in the last two years.
Indexed growth slows
Total indexed assets rose only 17.7% to $793.38 billion as of Jan. 1 from $673.969 billion a year earlier, after nearly doubling during 1995. Assets among the top 25 domestic equity indexers grew only 16.9% to $474.3 billion from $405.7 billion; the top 25 domestic fixed-income indexers' assets grew only 7.6% to $87.878 billion from $81.639 billion.
On a market-adjusted basis, domestic equity indexers actually lost ground. Once adjusted for the S&P index's 22.96% return, the top 25 equity indexers dropped 4.9%. The top 25 fixed-income indexers showed only a 3.9% gain on a market-adjusted basis, but that's still better than their market-adjusted rate during 1995, when they showed a 7.4% drop in assets.
Enhanced equity indexers fared better. The assets of the top 25 enhanced equity indexers grew 30.6% to $67.475 billion from $51.653 billion (6.2% on a market-adjusted basis), while the top 25 enhanced bond indexers rose 7% to $54.59 billion from $51.032 (3.2% when adjusted for the market).
Indexing might have leveled off among the defined benefit plans, but it is still very popular among defined contribution plan participants, said Mr. Nesbitt. He estimated one-third of defined contribution equity assets, excluding company stock, is now indexed.
Mr. Ehrhardt noted that when Milliman & Robertson is consulting on defined contribution plan design or option changes, "you get quite a bit of questions from clients and participants, and the questions are: 'Why should we have an index fund?' or 'Why we don't have one?'*"
To be fair, a lot of growth in passive assets was in enhanced indexing, "which is still sort of a novel concept, and novel concepts experience sharp growth at first," said Mr. Lummer.
Overall, indexing is close to its natural equilibrium, said Mr. Lummer. He noted that, on one hand, it is impossible for it to dominate the marketplace, because there is still much marketing of active products being done. On the other hand, he noted indexing will not drop off the face of the earth after its period of popularity because it is cheap and makes sense for large blocs of assets.
Barclays Global Investors was the top domestic indexer for the sixth year in a row. It managed $150.538 billion in domestic indexed equity and $36.284 billion in domestic indexed fixed-income assets. State Street was second, with $95.855 billion in equity and $4.082 billion in fixed income. Third-place Bankers Trust continued to improve, increasing its indexed equity assets to $86.03 billion in 1996 from $75.198 billion in 1995, while fixed-income index assets grew to $3.448 billion from $2.988 billion in 1995.
While indexing asset growth was tepid across domestic classes, it was not in the international segment. Among the top 25 international index managers, indexed equity increased 34.2% to $94.06 billion from $70.084 billion. International bond indexing rose 20.3%, but its dollar totals only rose to $1.259 billion from $1.047 billion in 1995.
Overall, international indexed equity assets rose 34.4% to $94.24 billion and international fixed-income assets rose 20.4% to $1.26 billion.
On a market-adjusted basis, indexed international equity rose 26.2% and indexed international bonds rose 15.5% overall. The Morgan Stanley Capital International Europe Australasia Far East Index returned 6.36% for the year, and the Salomon Non-U.S. World Bond Index returned 4.1%.
There might be mixed messages here, said Mr. Nesbitt. Some large DC players such as State Street and Bankers Trust have been very successful offering international indexed products, so the increase in international indexing might be more a function of the success of those providers than an endorsement of that investment style, he said.
But there are reasons there is a place for indexing in international portfolios, said Mr. Lummer.
Research suggests the assumption that foreign markets are poorly followed and more inefficient than the U.S. market is not true, he said. Not only are markets in the EAFE countries well followed, but over any long period, the performance of good and bad stock selections tend to cancel each other out, he said.
Ibbotson's research indicates more than 90% of the variation in performance among international managers is based on country allocation, not security selection, he said. For example, he noted the top performing managers in the last few years have been those most underweighted in the Japanese market.
The top international indexers were the same firms as last year: State Street Global, Barclays and Bankers Trust. Last year's fourth, Boston International Advisors, Boston, dropped off the list after it was acquired by Independence Investment Advisors Inc., a subsidiary of John Hancock Mutual Life Insurance Co.
Boston International was replaced in fourth place by Munder Capital Management, Woodbridge, Mich., which increased its assets to $2.3 billion from $1.543 billion, to move from sixth place. Alliance Capital Management, New York, remained in fifth place despite increasing its passive international assets to $2.156 billion from $1.782 billion.
International assets climb
Total international assets continued their upward climb in 1996, to $456.711 billion from $369.751 billion a year earlier and $272.229 billion during 1994. International equity rose to $380.115 billion from $299.836 billion in 1995, while international fixed-income assets rose to $76.596 billion from $69.915 billion. On a market-adjusted basis, international equity rose 19.2%, while international fixed income rose 5.2%.
Sponsors apparently don't see the point in investing in fixed income abroad, certainly not to the level that they invest in overseas equities, said the consultants.
While more people are acting on their instinct to diversify internationally, most consultants argue the need for international fixed income and its diversification benefits are not comparable to equity diversification, Mr. Nesbitt said.
For a pension plan making the initial decision to diversify internationally, equity provides all of the necessary diversification benefits with less currency risk than bonds, said Mr. Lummer.
"It leaves international fixed income as the odd man out," said Mr. Ehrhardt.
Two years ago, the still-weak dollar made the short-term performance of international fixed-income managers "look petty darn good," said Mr. Lummer. But, he warned "if the dollar rises like it has done the last two years, you don't look real good."
The top managers of international active assets (equity and fixed income combined) were Capital Guardian Trust Co., Los Angeles, with $28.29 billion, and Brinson Partners Inc., Chicago, with $18.15 billion. Schroders, New York, rose to third from fourth thanks to a 26% increase in international assets, to $17.643 billion from $14.002 billion. Morgan Stanley Asset Management Inc., New York, rose to fourth from seventh with a 55.5% increase in international assets to $16.677 billion from $10.728 billion. J.P. Morgan Investment Management dropped to fifth from third despite increasing international assets 16.5% to $16.431 billion from $14.1 billion
The manager-of-managers segment didn't benefit from the growth in total assets. U.S. institutional assets assigned to other firms by the top 25 managers of managers rose to $110.934 billion from $88.054 billion a year earlier, but still well below the $147.062 billion total in 1994. Most of the top 25 also saw a drop in the assets they assign to others; Vanguard Group, the top manager of managers in 1996, saw assets rise to $40.703 billion from $36.08 billion, but still lower than its $45.4 billion in 1994. Frank Russell Co., Tacoma, Wash., remained in second despite nearly doubling its manager-of-manager assets, to $20.3 billion from $10.7 billion.
Investments in pure guaranteed investment contracts also declined, falling to $101.209 billion from $132.666 billion a year earlier. (This number measures bullet and window GICs; it does not count synthetics, bank contracts or other stable value offerings). Most insurers reported lower or flat assets in GICs: Principal Financial Group grew only to $16.152 billion from $15.948 billion; New York Life Insurance Co. dropped to $14.304 billion from $14.635 billion; and John Hancock Financial Services grew only to $12.515 billion from $12.025 billion in 1995.