Mergers and acquisitions played a major role in shaking up the ranking of the world's largest money managers, which collectively managed $29.1 trillion in assets at year-end 1998, according to the P&I/Watson Wyatt World 500.
Indexed managers continued to make steady 20%-plus gains, outgunning the average active manager, according to the annual survey by Pensions & Investments and Watson Wyatt Worldwide, Reigate, England.
Of the top 20 managers, only Fidelity Investments, Boston; Vanguard Group Inc., Valley Forge, Pa.; and the Capital Group Cos. Inc., Los Angeles, experienced significant growth organically, noted Philip Robinson, head of research for Watson Wyatt's global as set study.
In fact, some top managers that did not acquire or merge witnessed declines in their rankings. For example, Prudential Insurance Co. of America, Newark, N.J., fell from eighth to 18th as assets under management dropped 9.7%.
And New York-based Merrill Lynch & Co. Inc. -- which previously had acquired Mercury Asset Management PLC, London -- dropped three slots to eighth place, while J.P. Morgan Investment Management Inc., New York, slipped a notch to 19th.
Concentration in the industry continued to build, although it's nowhere as tight as, say, the global automotive or pharmaceutical industries where a few players dominate. Still, the top 50 money managers ran 55.8% of assets measured in the survey, up from 52.5% the previous year. In contrast, the next 50 largest managers' market share held virtually steady at 17.8% of assets under management.
Shakeout at the top
Seizing the throne as the world's largest money manager was UBS AG -- the combined holding company formed from the 1998 merger of Union Bank of Switzerland and Swiss Bank Corp.
UBS reported $1.14 trillion, but the total includes advisory assets, for which the Zurich-based bank declined to provide a breakout. Similarly, fourth-ranked Credit Suisse's total included some advisory assets.
Japanese postal life insurance system Kampo, which previously had dominated the rankings, slid to third. The decline, however, stems not from a drop in value but a closer scrutiny of Kampo's books.
Some 30 trillion yen loans to governmental organizations were inappropriately characterized as assets under management. That means Kampo's total of $758.5 billion last year should have been reduced by some $230 billion, putting Fidelity Investments as the top-ranking manager. The UBS merger, however, would have shifted Fidelity to second place.
Buoyed by a 14.5% increase in the yen's value in 1998, Kampo actually experienced a 32.9% jump in its assets under management last year.
M&A boosts firms
But it was mergers and acquisitions that told the bigger story.
In addition to the formation of UBS AG, the ranks of the leading money managers were littered by merger activity -- particularly in Europe where the expected adoption of the euro had caused a flurry of activity.
For example, Brussels, Belgium-based Fortis jumped to 21st in the rankings from the merger of Fortis-ranked 44th last year and 83rd-ranked Generale de Banque. In addition, The Hague-based ING Group picked up $49.3 billion in assets under management from its acquisition of Banques Bruxelles Lambert, boosting the Dutch group to 24th from 40th last year. And Appeldorn, Netherlands-Achmea's purchased of Amsterdam-based PVF Pensioenen created a money manager with $60 billion in assets, ranked 121st.
Merger and acquisition activity was heated outside of Benelux as well. In France, life insurers Group- ama and GAN merged, creating an entity with $45 billion in assets under management, ranking 141st. In Italy, Istituto Mobiliare Italiano merged with Istituto Bancario SanPaulo di Torino, forming Sanpauolo IMI with $97.8 billion in assets under management and ranking 79th.
And in the United States, the combination of Citibank and Travelers Group Inc. formed the 16th-ranking money manager with $354.6 billion in assets under management. In the previous year, Citibank Global Asset Management had been ranked 63rd while Travelers had been ranked 36th.
Cross-border activity also picked up, with a number of managers buying into the U.S. market.
Sun Life Assurance Co. of Canada acquired MFS Institutional Advisors, Boston, with a combined $163 billion in assets. Paris-based AXA acquired Rosenberg Institutional Equity Management, Orinda, Calif., adding $7.6 billion to the fifth-ranked French behemoth. And Utrecht, Netherlands-based Rabobank -- which owns 50% of Robeco -- purchased Weiss, Peck & Greer, New York, boosting the bank to 82nd from 102nd last year.
Meanwhile, Pittsburgh-based Mellon Corp. picked up a majority stake in Newton Investment Management, London.
In more distant markets, Sydney, Australia-based AMP Ltd. acquired Henderson Investors, London. Even the South African firms started looking abroad: Cape Town-based Investec Group picked up a foothold in London with the purchase of Hambros Guinness Flight Asset Management Ltd.
Deals closing after 1998, such as Deutsche Bank's acquisition of Bankers Trust, are not reflected in the rankings.
John Casey, chairman of BARRA RogersCasey Inc., Darien, Conn., said the market will continue to see mergers where asset management is a residual part of the deal. In the middle part of the market, however, he said, "there aren't that many firms that are acquirable."
Index managers triumph
If mergers and acquisitions was the main story of 1998, the rise of index managers -- including a newfound push in parts of Europe -- was a strong second.
Barclays Global Investors, San Francisco, shot up 26.7% to $615.5 billion in 1998, while Boston-based State Street Global Advisors' assets under management climbed 24.2% to $495.1 billion.
Vanguard Group, the biggest retail index manager, saw assets jump 28.4% to $447.5 billion, while Mellon Bank experienced a 28.8% increase to $336.5 billion.
In the United Kingdom, assets under management at London-based Legal & General Group PLC grew 27.8% as British pension funds sharply increased their use of index managers. An increase to $131.4 billion raised L&G's ranking to 57th this year from 62nd last year.
The rise of indexation has severe implications for revenue. Nigel Russell, whose Edinburgh, Scotland-based firm NJR Research does an annual analysis of the global money management industry that is published by Charterhouse Securities, London, estimates $1.8 trillion was invested in index strategies at the end of 1998, of which $1.5 trillion was sourced from U.S. investors.
Index fees on average are 75% less than active fees, he added. Ignoring some $500 billion in internally managed passive strategies, Mr. Russell wrote industry revenue would be slashed to $6.5 billion from $26 billion.
Opportunity in Japan
Meanwhile, Western money managers are facing an unprecedented opportunity in Japan. On the retail side, Western managers have picked up about 3.8 trillion yen (U.S.$33.2 billion) of the 11 trillion yen in stock funds, which include domestic and international equities and foreign bonds, said Kaz Yasuda, a Watson Wyatt consultant.
On the institutional side, the figures are more nebulous. Of the 20% to 30% of the corporate pension market that is run by independent investment advisers, about one-fifth has been picked up by foreigners. Figures on Japanese public pension funds are kept secret, Mr. Yasuda said.