U.S. institutional tax-exempt money managers had an "abhorrent" year in 1998 in spite of -- or perhaps because of -- their highest allocation to stocks in recent years.
Overall, internally managed U.S. tax-exempt assets under management grew 14% in 1998 to $6.5 trillion, according to the results of Pensions & Investments' annual money manager survey. But once that asset figure is adjusted to reflect market returns for the year, total assets were down almost 4%, with the top 100 managers down close to 2%.
"1998 was an abhorrent year," said Paul Holt, president of Cambridge International Partners Inc., New York, an investment banking firm that follows the asset management industry.
"While the S&P 500 looked terrific, most managers underperformed, due in part to the great disparity between large-cap and small-cap stocks, and because more stocks declined in value than rose in value," Mr. Holt said.
Boston-based State Street Global Advisors remained No. 1 in P&I's ranking.
With $405.3 billion in U.S. tax-exempt institutional assets under management at year's end, SSgA was up 21.2% from the $334.4 billion it reported in last year's survey.
SSgA's success has been in areas other than the structured products business, which has been a strong growth area for the firm, said John Grady, the company's head of sales, client service and consultant relations.
"We had a fair amount of increase across the equity side, both passive and active," he said.
"We went from 592 searches in 1997 to just under 800 last year. We responded to 791 RFPs and RFIs in 1998."
"Over the last two years, over 70% of our incremental revenue came from existing clients compared to 35% to 40% previously," Mr. Grady said. "We've increased our presence in the DC market and have a focus strategy toward public funds and the Taft-Hartley market."
Second-place Barclays Global Investors, San Francisco, saw its tax-exempt institutional assets grow to $398.4 billion on Dec. 31, up 20.8%.
Third was Fidelity Investments of Boston, with $319.1 billion in total U.S. institutional tax-exempt assets at year end, up 27%.
Barclays and Fidelity also were second and third last year.
When ranked by total assets under management worldwide, Fidelity led with $785.6 billion, up 23.7%, followed by Barclays with $615.5 billion, up 21.9%, and SSgA, $495.1 billion, up 24.1%. The three held the same rankings last year.
Market impact
The asset growth depicted in the current survey is a far cry from the most recent stellar year, 1996, when the assets of all the managers profiled increased more than 20% on a market-adjusted basis, and nearly 40% total.
The median institutional equity manager underperformed the Standard & Poor's 500 stock index by 13 percentage points in 1998, according to the Pensions & Investments Performance Evaluation Report.
Managers, in aggregate, had more than 56% of their assets in equities last year. That could have both hurt and helped the managers, said Cambridge's Mr. Holt, considering the success of some growth stocks vs. value stocks.
Large-cap growth stocks performed quite well in 1998 compared to small-cap growth and most capitalizations of value stocks.
"The majority of small and midsize managers work in the midcap and smaller-cap stock area," he said. "This was the year of the Nifty 50, which really is a small portion of all stocks."
The overall average stock allocation was 56.1% in 1998, compared with 54.9% in 1997 and 47% in 1990.
The rest of the overall average allocation was: 26.8% bonds; 9.2% cash; 2.1% real estate; 0.9% mortgages; 3% mortgage-backed securities; and 1.9% other.
For the year, the S&P 500 returned 28.6%; the Salomon Broad Bond index, 8.7%; the NCREIF Property index, 16.1%; the Morgan Stanley Capital International Europe Australasia Far East index, 20.3%; the Salomon Non-U.S. World Government Bond index, 17.8%; the Lehman Brothers mortgage-backed index, 7%; and 90-day Treasuries, 5.1%.
Total assets for the top 100 managers increased 16.5% to $5.3 trillion, but after an adjustment for market performance, the top 100 were down 1.7% for the year.
The top 100 average asset mix was 55.8% stocks, 26.9% bonds, 10.4% cash, 0.9% real estate, 0.9% mortgages, 3.3% mortgage-backed securities and 1.8% other.
Defined contribution growth
Defined contribution assets grew 22% overall.
Among managers of defined contribution assets, the top two didn't change from the previous year's survey.
Top-ranked Fidelity increased its defined contribution assets 29.2% to $287 billion in 1998. Second-ranked Teachers Insurance and Annuity Association-College Retirement Equities Fund of New York had defined contribution assets of $245.2 billion, up 14.9% from 1997.
Rounding out the top five were SSgA with $134.2 billion, Barclays with $78.3 billion, The Vanguard Group Inc. with $67.5 billion and Prudential Insurance Co. of America with $57.6 billion.
The $1.7 trillion in total defined contribution assets reported in this year's survey represent more than a quarter of the $6.5 trillion in total institutional tax-exempt assets managed internally. That's about the same proportion as last year, and up from 23% of total assets in 1996.
Defined contribution asset growth might be slowing because the market has matured. Growth is coming primarily from small pension plans, with less than 1,000 participants, said Ruth Hughes-Guden, a principal at Morgan Stanley Dean Witter Investment Management, New York. She is the head of Morgan Stanley's large defined contribution plan business. Large plans are defined as those with more than 1,000 participants.
"There isn't the number of vendor searches there used to be. Most large plans have record keepers in place and it's a major decision to change. In the large-plan segment, most (sponsors) are adding new (investment) strategies or replacing managers," she said.
Total international assets for all managers profiled increased 15% to $660.9 billion. But when adjusted for market returns, international assets were down 4.1%.
Assets run by the 25 largest active international managers accounted for more than half of that total. Those assets grew 15% to $348.8 billion, but dropped a market-adjusted 3.8%.
Capital Guardian Trust Co., Los Angeles, led the top 25 active international managers again this year. Cap Guardian had $44.8 billion in international assets under management on Dec. 31, up nearly 30% from a year earlier.
The next three managers also ranked the same this year as last -- Morgan Stanley Dean Witter & Co. up 6.6% from 1997 with $36.8 billion; Schroders, up 28% with $26.4 billion; and UBS Brinson, up 20.5% with $23.3 billion. TIAA-CREF moved to fifth place from ninth place by increasing assets 52% to $19.9 billion.
The top 25 managers of passive international assets saw those assets rise 11.5% to $136.4 billion overall. Equity assets were up 10% to $154.9 billion (including enhanced international indexed assets), and up 6% when adjusted for the EAFE; bonds were up 164% to $2.8 billion overall, and a market-adjusted 124%.
SSgA led the ranking of passive international managers with $56.8 billion, up 27.6%. Rounding out the top five were Barclays, up 15% to $40.5 billion; Bankers Trust Co. up 17.6%, to $21.3 billion; Munder Capital Management up 3% to $3.1 billion; and Alliance Capital Management LP up 19.7% to $2.7 billion.
Indexed assets in general -- domestic and international -- rose 12.6% to $1.25 trillion from $1.11 trillion. When adjusted for the market, however, managers slumped 9.5%.
Assets invested in passive domestic equity products increased the most, 23%, to total $769.2 billion. Adjusted for the 28.6% return of the S&P 500, indexed equity assets actually declined 4.4%.
Who owns the managers
Other survey data showed the roller coaster attempts by worldwide banks to establish stronger footholds in the asset management business might be bearing fruit.
Banks and trust companies controlled 41% of the assets of the top 100 money managers, according to the survey, an increase from 39% in 1995, the last time that data was collected.
Investment advisers control more than 47% of the assets of the top 100 money managers, compared with 40% in 1995.
Insurance companies now control just more than 12% of the assets of the top 100 managers, according to the survey, compared with 22% in 1995 and 37% in 1990.
P&I's survey data reflect assets as of Dec. 31; 767 independent investment firms, banks and trust and insurance companies responded.
