The economic recovery in Japan and the emerging markets helped propel international equities managers to strong gains for 1999.
The $954.7 billion in international assets managed for U.S. institutional tax-exempt institutions by the firms profiled in this issue -- active and passive -- are up 18% when adjusted for the Morgan Stanley Capital International Europe Australasia Far East index's 1999 return of 27.3% and the Salomon World Government ex-U.S. bond index's -5.1% return for the year.
The $864.3 billion in international equity assets alone are up a market-adjusted 20%.
The top 25 active equity managers had a market-adjusted 29.3% increase in assets to $495.7 billion, while the top passive equity managers had a 1.7% market-adjusted increase to $173 billion. Enhanced international index assets, reported by 12 firms in this survey, had a market-adjusted 13% increase to $30.7 billion.
The international bond market didn't fare as well, although it held steady on a market-adjusted basis, it dropped $4.9 billion to $90.5 billion overall. Fixed-income assets of the top 25 active managers were down a market-adjusted 30% to $31.7 billion. Passive international bond managers, however, were up a market-adjusted 24% to $3.3 billion.
"The continuing growth in international equity assets is not a surprise," said Andrew Dyson, a consultant with William M. Mercer & Co., New York. "For anyone going through a modeling process, we would suggest international equities."
But he was surprised by the increase in assets among passive bond managers. Normally, he said, in international investing "you expect to see more active investing because of the opportunity it presents for adding value."
No one interviewed could explain the change.
Last year "was the first time in many years that the international equity markets were ahead of the U.S. equity markets," said Patrick Rudden, a consultant with BARRA Rogers-Casey, Greenwich, Conn.
"The U.S. markets had an incredible run, but you wouldn't expect them to be the best markets consistently," he added. The lower returns in U.S. markets "reinforces the case for diversification."
Holding on to its place at the top of the list of active international managers was Capital Guardian Trust Co., Los Angeles.
"We had exceptionally good investment results last year and had a sizable gain in the number of new clients that also added significantly to our assets," said John Seiter, executive vice president. The firm reported $78.2 billion in actively managed international equity assets at year-end 1999, up 83% from a year earlier. "We had a fairly decent representation in technology and telecommunications and a lot of our portfolio in Japan last year," which contributed to the strong results.
Putnam up to fourth
Boston-based Putnam Investments Inc. benefited from the upswing in foreign markets last year, jumping to fourth from seventh place on the active rankings, with $32.3 billion in equity assets, up 126% from a year earlier.
"Active management has so routinely beat the index in international (in 1999)" that pension plan sponsors are moving into the category, said Frank Porcelli, chief of institutional sales and service at Putnam.
"There is a higher degree of comfort today in international markets than five to 10 years ago when Japan was a bigger part of the index," said Drew Collins, a senior managing director of the College Retirement Equities Fund, the equity side of TIAA-CREF, which ranked eighth among the top 25 active international managers, having $20.3 billion in equities.
Mr. Collins pointed out that Japan had represented about 65% of the EAFE index in 1989, but is only about 26% of it now.
He also said the advent of the euro had helped international investing by making it easier for investors. "From a currency standpoint, it's more concentrated now, with the yen, euro and pound being the three major currencies outside the U.S.," he said.
Bank of Ireland Asset Management (U.S.) Ltd., Greenwich, Conn., was ninth on the list of active international managers with $24 billion in equity assets, up 56%.
Denis Curran, president, described his firm as "bottom-up stock pickers," and added "there's a lot of opportunities in the `old' economy. You have to be stock-specific these days. Our focus is on companies with real earnings."
On the passive side, the strong international markets led to a large number of new accounts for State Street Global Advisors, Boston, which ranked first in the passive category with $81.7 billion in international equity assets up 44% from year-end 1998.
For this survey, State Street reported $626 million in passive international bonds, a year earlier it had reported none. "We've been interested in heightening the awareness of our passive fixed-income business," said John Grady, head of sales and marketing. "We've had a number of clients that expressed interest in it, so we're doing more in it."
Mr. Grady said the interest is continuing so far this year and the firm won four large mandates, totaling $746 million, for passive international fixed-income accounts in the first quarter of the year. "We're also starting to see additions to existing accounts in the passive international area," he said. "We're continuing to see the trend toward having a passive core (portfolio) and putting satellites of active management around it."
Bill Mahoney, director of marketing at Bridgewater Associates Inc., which specializes in international bond management, said "1999 was a tough year for global bond managers. Most global bond managers are fundamental in nature and it was a tough year for fundamental managers."
By fundamental, he means "using the economic fundamentals of economies to make active decisions."
`A lot of searches'
However, he believes 1999 was an anomaly -- "one bad year out of the last five" -- with a lot of activity now going on in the global fixed-income markets. "We've been involved in a lot of searches," he said.
Bridgewater ranked 10th on the list of passive international managers with $1 billion in fixed-income assets.
At Barclays Global Investors NA, San Francisco, which was second among passive managers with $48.5 billion in equity assets, up 21% from a year earlier, Binu George, a principal and international equity strategist, said "the good news is that 1999 is the first year (since 1994) where the international markets have outperformed the U.S. markets."
He also said a small but growing number of BGI clients are using the MSCI All Country World ex-U.S. index as their benchmark now. The ACWI includes emerging markets and Canada, which are not in EAFE, so some international managers consider it a more complete index. The MSCI ACWI had a 30.9% return in 1999.
Mr. George said BGI gained its first $20 million ACWI account in 1997 and now has more than $10 billion in assets benchmarked to that index.
Axe-Houghton Associates, Rye Brook, N.Y., slipped to seventh from sixth place in the passive category, with $2 billion in international passive equities. Seth Lynn, chairman and chief executive officer, said Axe had lost one big account -- the Public Employees Retirement System of Nevada, Carson City, which took $500 million from his firm to give to an active international manager.
But, he said, with the performance last year of international equities, his firm is now "seeing more interest in international indexing than we did for the last couple of years." The firm has been included in more manager searches this year than in several years.
Among managers reporting assets in enhanced indexed international equities, TIAA-CREF again was the leader, with $14.4 billion under management, up 19%. Baring Asset Management, Boston, held on to second place, with $7.6 billion vs. $5 billion.
"What we see at the large end of the market is more consideration for these types of strategies," said Mark Majka, senior vice president of sales and client service at Baring.
"Clients want the core portion of their assets tied to the benchmark," he added, but they also realize "international managers can add value above passive but without losing the intent of passive."
DSI International Management, Norwalk, Conn., was fifth among enhanced indexers, with $1.3 billion in assets, making the list for the first time. "We take very small bets tilting the portfolio to those factors dominating each region," said John Holmgren, president and chief investment officer.
Boston-based Fidelity Investments was sixth in enhanced indexing, also making the list for the first time. Fidelity has $1 billion in enhanced indexed assets. "Our whole effort in international began to pay off in the last year," said Michael Forrester, senior vice president of Fidelity Management Trust Co. The growth came from "a combination of existing clients giving us new assignments and new clients."
Although a majority of the firm's mandates have been benchmarked to EAFE, Mr. Forrester said that about 20% of new clients are asking the firm to use the ACWI benchmark. "The trend is picking up," he said.