The largest 25 managers of mutual fund assets in defined contribution plans saw assets decrease 7.2% in 2001.
In a year that included the Sept. 11 attacks and the Enron Corp. scandal, the stock market recorded its worst performance since 1973. And that hurt defined contribution mutual fund assets of the top 25 managers, which dropped to $828.1 billion from $892.6 billion, according to data from Pensions & Investments' annual survey. To compile the data, P&I asks mutual fund managers to list their funds by defined contribution assets, and then P&I pulls the 100 largest equity funds and fixed income funds.
Only nine of the top 25 money managers saw assets increase. Those that made the biggest climbs were primarily fixed-income managers like Pacific Investment Management Co., Newport Beach, Calif. PIMCO was the biggest gainer on the charts; assets increased 68% to $12.2 billion while Federated Investors, Pittsburgh, saw assets jump 17% to $12 billion.
On the other side of the fence, growth-oriented equity managers such as Janus Corp., Denver, and Putnam Investments Inc., Boston, were hit the hardest - assets declined 16% and 15.4%, respectively, last year.
Fidelity down 4%
The largest manager of mutual fund assets in defined contribution plans, Fidelity Investments Inc., had assets decline 4% to $287 billion in 2001.
"It was a different kind of year than we've seen in a long time," said Peter Smail, president of Fidelity Employer Services Co., which encompasses the retirement and benefits outsourcing operation at Fidelity. But all things considered, Fidelity had one of its best years, said Mr. Smail, bringing in 1,500 new plans and 1.1 million new participants through its full-service defined contribution offering. Among new full-service clients in 2001 were the defined contribution plans of Verizon Communications Inc., Dow Chemical Co., the State Board of Administration of Florida and BellSouth Corp.
"There was always a big question out there: How would defined contribution plan participants react in a down market? Would they all bail out of the markets and head for the exits?" said Mr. Smail.
As it turned out, participants largely "stayed the course" in 2001. "Participants understand what they're doing; they are focused on long-term retirement goals, and they're sticking to their investment disciplines," said Mr. Smail.
What has had more of an impact on plan sponsor and participant attitudes is the Enron scandal, said Mr. Smail. As a result of Enron, sponsors are starting to lift restrictions on company stock and raising questions about plan transitions during blackout periods. Also, he said, the matter of advice in defined contribution plans has come to the fore in Washington. "We support any legislation that makes investment advice more accessible," said Mr. Smail.
Fidelity Magellan, managed by Robert Stansky, remains the largest mutual fund in the P&I universe with $51.8 billion in defined contribution assets. Magellan, which returned -0.76% for the year ended March 31, saw assets decline 13% in 2001. Fidelity accounts for seven of the 10 largest funds in the P&I universe. The No. 3 fund, Fidelity Contrafund, managed by William Danoff, had $18.5 billion in assets. Fidelity Growth & Income ($17.7 billion), Growth Company ($15 billion), Equity-Income ($14.4 billion) and Spartan U.S. Equity Index ($14 billion) placed fourth through seventh in assets. Fidelity Blue Chip Growth, with $11.3 billion in defined contribution assets, placed 10th. All seven Fidelity funds were in the top 10 in last year's survey.
Vanguard Group Inc., Valley Forge, Pa. - the second largest defined contribution manager in the P&I universe - was one of just two top 10 firms that increased assets in 2001. Vanguard finished the year with $131.9 billion in defined contribution assets, an increase of 1.7%.
While the Vanguard 500 Index Fund, the second largest mutual fund in the P&I universe, saw assets decrease 8.4% to $22.9 billion, other funds in the family picked up the slack. The Vanguard Total Bond Index Fund, the second largest bond fund in the P&I universe with $3.9 billion in assets, saw assets increase 51.5% in 2001 while Vanguard Windsor II increased 8.2% to $7.2 billion.
The increase in defined contribution plans with open architecture has been beneficial to Vanguard, said Gerard Mullane, principal at Vanguard Group, because more Vanguard funds are available through competitors' programs.
Capital Research & Management Co., Los Angeles, is the only other top 10 firm to see an increase in defined contribution assets. Capital Research, the third largest money manager in the P&I universe, saw assets increase 5.5% to $83.1 billion in 2001.
Capital Research is the only firm besides Fidelity and Vanguard with equity mutual funds that rank among the top 10 in defined contribution assets. The Capital Research Washington Mutual Investors Fund is the eighth largest equity fund with $11.9 billion in assets while the Growth Fund of America is ninth with $11.5 billion in defined contribution assets. These were the only two funds in the top 10 that experienced an increase in assets in 2001. Washington Mutual jumped 9% while Growth Fund of America increased 10.3%.
The latter is the only newcomer to the top 10, moving from 14th place in last year's survey. It replaces Vanguard PRIMECAP which fell to ninth place from 12th after assets plunged 15% to $10.1 billion.
Putnam holds on
Despite a 15.4% drop in assets, Putnam Investments remains fourth in the P&I survey with $40 billion in defined contribution assets in mutual funds. Putnam's largest funds in the survey, Voyager and New Opportunities, dropped the sharpest in assets declining 44% and 41.7%, respectively. Putnam Voyager, a large-cap growth equity fund, dropped to $6 billion, while New Opportunities, also large-cap growth, fell to $4.6 billion in assets.
John Brown, head of Putnam Institutional, said asset erosion on the defined contribution side was not as sharp as the companywide 28% drop in assets. The defined contribution decline is related almost exclusively to market depreciation, said Mr. Brown. "Plan participants are not voting with their feet," he said, "and that speaks to the patience of the long-term, rational investor."
That said, Mr. Brown said the firm was disappointed with its results, particularly in the large-cap growth area.
"We didn't advance many people's cause last year, and that's disappointing," he said. "We take this stuff seriously, helping people plan for retirement. If we go through a year like last year when assets don't go up, that's hurtful because we didn't help anyone get closer to retirement."
As a result, Putnam has been busy the past six months. The firm has eliminated and merged portfolios, changed management teams on several of its large funds and refocused the investment objective on some of the more aggressive growth funds to lower the risk profile. Also, the defined benefit and defined contribution marketing and sales group were combined into one unit.
T. Rowe Price Associates Inc., Baltimore, moved to fifth place on the list, bumping Janus into the sixth spot. Despite the fact that T. Rowe Price saw assets drop 3.7% to $34.9 billion, it was enough to move ahead of Janus, which saw assets fall 16% to $32.9 billion.
Janus' flagship fund, the Janus Fund, managed by Blaine Rollins, fell to 16th place on the list from 13th a year ago as assets dropped 35.7% to $6.7 billion.
Mr. Rollins said the past 12 to 18 months were the most difficult period he and many other portfolio managers ever have experienced. The fund returned -9.9% for the 12 months ended March 31, but things have picked up through the first quarter of 2002 and the fund just about broke even for the quarter.
If there is a bright side, it was that Mr. Rollins and his team had a chance to scrutinize the portfolio and make changes. The down market really separated the wheat from the chaff in terms of companies that stayed strong.
"It was a chance to take that wet cloth, wring it as hard as you can and see which names made it through the wringer," said Mr. Rollins.
The result was the elimination of 10% to 15% of the companies in the portfolio, including big names such as EMC Corp., Enron, and Texas Instruments Inc. "We got to test every business model in the Janus Fund. Some business models we thought would perform much better in a declining marketplace, and they didn't," he said.
He reduced the portfolio's exposure to Enron in the spring of 2001 pretty significantly, but still took a hit when Enron filed for bankruptcy protection, he said.
Mr. Rollins also went on the road and looked at companies in all sectors of the market that could perform in a slowing economy. Mr. Rollins found some strong companies in the industrial sector, such as The Stanley Works and Illinois Tool Works Inc., and added them to the portfolio.
"I'd like to think we have some really good exposure to a recovery in the U.S. and worldwide economies," said Mr. Rollins.
Overall, equity fund assets in the P&I universe totaled $435 billion, a decline of 15% from the previous year.
Fixed-income assets, on the other hand, were up 18% to $55.7 billion for the 100 largest bond funds most used in defined contribution plans.
The largest fixed-income fund in the P&I universe, the PIMCO Total Return fund, had a monster year in terms of asset growth. As the second-best performing fund, it ballooned 84% to $9.7 billion in assets, up from $5.3 billion at the end of 2000.
The Vanguard Total Bond Index Fund moved to second on the list, leapfrogging the Capital Research Bond America Fund, which fell to third place. The Vanguard Total Bond Index Fund grew 51.5% to $3.93 billion while the Capital Research Bond America Fund grew 32.5% $3.91 billion. Two Fidelity funds round out the top five, the Fidelity Intermediate Term Bond Index Fund, with $2.9 billion in assets, and the Fidelity U.S. Bond Index Fund, with almost $2.4 billion in assets.