Institutional money managers accomplished the impossible: They walloped the market and came out ahead in 2001 on a market-adjusted basis.
Money managers' internally managed U.S. institutional tax-exempt assets, adjusted for the impact of the markets, climbed 4.7%. last year - in sharp contrast with flat market-adjusted growth of 0.2% in 2000 and 0.8% in 1999.
On an unadjusted basis, however, Pensions & Investments' annual ranking of the largest U.S. institutional money managers shows assets dropping 2.5%, to $7.1 trillion as of Dec. 31.
Credit for the market-adjusted growth of institutional money managers last year goes to strong performance. The median domestic equity, international equity and international fixed-income portfolio in the PIPER managed accounts universe handily outperformed the indexes - by more than 500 basis points for domestic equities, for example - in the year ended Dec. 31.
"2001 was a pretty good year for active management in general. The explanation is pretty simple: When small-cap does well and markets do poorly, active management tends to do well," said Joseph S. Nankof, senior consultant and partner at Rocaton Investment Advisors LLC, Darien, Conn.
Outperformance of active domestic equity managers was due in part to their small-cap bias, Mr. Nankof said, which smoothed out 2001 performance relative to market indexes that tend to overweight large-cap companies. The Russell 2000 index returned 2.49% in 2001, for example, compared with -12.45% for the Russell 1000. Higher percentages of cash in the portfolios of many active domestic equity managers also acted as a shield, keeping managers out of the punishing stock market, said Mr. Nankof.
Ups and downs
For the year ended Dec. 31, the Russell 3000 index returned -11.46%, the Morgan Stanley Capital International Europe Australasia Far East index plummeted 21.21% and the Salomon Non-U.S. World Government Bond index returned -3.54%. In positive territory for 2001 were the Salomon Broad Bond Index's return of 8.52%, the 7.28% return of the NCREIF Classic Property index and 4.09% for Treasury bills.
Looking beyond the U.S. tax-exempt institutional market, P&I's data showed worldwide institutional assets (unadjusted) jumping 5.4% last year to $13.5 trillion as of Dec. 31. Managers reported investing $20.9 trillion worldwide for all clients as of Dec. 31, up an unadjusted 3.5% from the prior year.
P&I is ranking all managers for the first time this year by worldwide institutional assets, reflecting the increasingly global nature of the money management community. Previously, the overall ranking was by U.S. institutional tax-exempt assets.
State Street Global Advisors Inc., Boston, recaptured the No. 1 position with $766.5 billion in worldwide institutional assets under management, a 7.6% increase from the year before. It ranked second last year to Barclays Global Investors N.A., San Francisco, which this year was second with $715.1 billion under management, down 5.4% from year-end 2000. Fidelity Investments, Boston, remained in third place with $639.5 billion in worldwide institutional assets, a 1.2% drop from the prior year. It was followed by Deutsche Asset Management, New York, which remained in fourth place with a 17% gain of $511.1 billion, and J.P. Morgan Fleming Asset Management, New York, which dipped 5.4% to end the year with $374.8 billion.
That many money managers "were able to withstand negative market returns and produce fairly strong asset growth really speaks to the resilience of the institutional market," said Peter Starr, managing director, Cerulli Associates Inc., Boston. "It says a lot about the nature of the institutional marketplace."
Positive growth in the institutional market was in distinct contrast to retail mutual funds, Mr. Starr said, where assets sank. Even the defined contribution plan market dropped 6% in 2001, according to Cerulli estimates.
Of the top 50 managers in P&I's ranking of worldwide institutional assets, 31 managers reported higher assets than the previous year, 16 reported lower and three managers were new to the ranking.
Some of the biggest winners last year were companies with both bond and equity capabilities, the latter often with a value bias. Some of the winners in terms of worldwide institutional assets as of Dec. 31 were:
* BlackRock Inc., New York, which increased 18% to $231.5 billion;
* Goldman Sachs Asset Management, New York, which also grew 18% to end the year with $226.3 billion;
* Federated Investors, Pittsburgh, up 27.6% to $167.7 billion;
* Banc of America Capital Management LLC., Charlotte, N.C., up 30.6% to $183.1 billion;
* Wellington Management Co. LLP, Boston, up 23.4% to $109.4 billion;
* AMR Investments, Fort Worth, Texas, up 39.1% to $28.7 billion;
* Diversified Investments, Purchase, N.Y., up 18.9% to $44 billion;
* Dodge & Cox Investments, San Francisco, up 16.9% to $50 billion; and
* Delaware Investments, Philadelphia, 38.1% to $60 billion.
Some of the managers that lost ground were:
* Schroder Investment Management North America Inc., New York, which dropped 24% to $131.8 billion;
* Lincoln Capital Management Inc., Chicago, down 43.7% to $36 billion;
* Dresdner RCM Global Investors, San Francisco, down 20.6% to $53.9 billion; and
* Baring Asset Management, New York, down 22.5% to $28.1 billion.
The year-end numbers can mask significant growth, said Kathy Taylor, managing director and head of institutional business at Barclays Global Investors. While worldwide institutional assets managed by BGI were $41.2 billion lower for the year ended Dec. 31 than for the prior year, net sales actually were up by $49.4 billion, she said.
"Our declines were due to poor global markets that were off an average of 20% last year. We think we had a banner year last year, with double-digit growth in profitability and revenues," she said. "In times of market decline, investors want alpha, but pay attention to risk. That plays nicely to our strategies," she said, adding that BGI's active and quantitative domestic equity, active domestic fixed-income and active long-short strategies were most popular with institutional clients last year.
Despite a near cessation of hiring activity after Sept. 11, money managers were surprisingly active overall in their search for alpha last year, according to P&I data and sponsor hiring information from Mercer Manager Advisory Services, New York.
Placement activity in 2001 was strong in several areas, said Robert G. Burke, head of the U.S. practice of Mercer's manager consulting arm.
First, institutional clients were enamored of alternative investments. Mercer data showed 27% of all placements - 16% of total placement dollars - by institutional investors went into alternative asset classes such as venture capital, hedge funds, private equity, timber and oil and gas, Mr. Burke said. Mercer tracked $15.3 billion in assets entering alternatives this year, much of it from institutional investors making their first allocations to these classes.
The P&I figures show venture capital assets up 103.7% to $17 billion and gross assets of hedge funds reported by managers for P&I's survey were up 16%. But private equity was down 19.9% and privately placed bonds, down 22%.
Market-adjusted growth of assets in overall international equity was up 16.5% to $721.3 billion, according to P&I data. Active international equity was up a market-adjusted 13.7% to $547.2 billion; passive international equity assets were up a market-adjusted 26.4% to $149.4 billion; and enhanced international equity growth, adjusted for the market, was up 24.6% to $24.7 billion.
Mercer data showed a spike in the hiring of international managers or moves between international managers. Although the number of placements was down to 115 in 2001, compared with 130 the previous year, dollars allocated were up, to $24.5 billion, compared with $14 billion the year before. Mr. Burke said 85% of the money allocated to international equity was placed in emerging markets, probably for the first time by many pension fund sponsors.
By contrast, most of the considerable activity by institutional investors in active, domestic, large-cap core and growth strategies was replacement hires of managers with better performance or style purity, Mr. Burke said. Mercer data show fewer active equity placements last year, to 313 last year vs. 383 in 2000, but assets placed were up to $20 billion from $18.2 billion the previous year. P&I data showed active domestic equity assets down 11% in 2001, compared with 2000, but when adjusted for market declines, they increased slightly by 0.5% to $1.7 billion.
Although active domestic bond returns were superior to those of stocks, they had fewer placements and lower market-adjusted growth in 2001 because plan sponsors rebalanced their portfolios. Mercer data showed bond placements were down to 96 from 167 the prior year. P&I data showed a 4.2% increase in bond assets, to $1.5 billion; that turned into a 4% drop when adjusted for the market.