Twenty years ago, when Fidelity managed only $65 million for tax-exempt clients and State Street basically was just a bank, insurance companies dominated the institutional investment management landscape.
What a difference two decades makes. Because of the 401(k) revolution and the raging bull market of the 1980s and '90s, the roster of the top institutional players today looks much different from 1982's list.
These days, money management titans like State Street Global Advisors in Boston, Barclays Global Investors N.A. in San Francisco and Fidelity Investments Inc., Boston, have settled, comfortably, at the top of Pensions & Investments' list of the largest managers of U.S. institutional tax-exempt assets. Overall, the 100 largest managers had $5.9 trillion managed internally at year-end 2001, nearly 12 times more than they had at the end of 1981.
Insurers, banks dominate
Twenty years ago, insurance companies and banks dominated the top 20 managers. Equitable Life Assurance Society of the U.S., New York, was the largest manager of U.S. institutional tax-exempt exempt assets, with $28.6 billion in assets under management, followed by Prudential Insurance Co. of America, Newark, N.J. with $25 billion.
Other insurance companies in the top 20 included Teachers Insurance and Annuity Association - College Retirement Equities Fund, $20.4 billion; Aetna Life Insurance Co., $19.2 billion; Metropolitan Life Insurance Co., $18.4 billion; Connecticut General Life Insurance Co., $11 billion; Travelers Insurance Co., $10.4 billion; and John Hancock Mutual Life Insurance Co., $9.5 billion.
Among the banks, Morgan Guaranty Trust Co. of New York was the largest, ranked third overall with $23.1 billion, followed by Bankers Trust Co., with $12.8 billion; Manufacturers Hanover Trust Co., $9.5 billion; Mellon Bank, $9.3 billion; Citi-Investments, $8.3 billion; Crocker National Bank, $7.6 billion; Harris Trust and Savings Bank, $7.3 billion; Chemical Bank, $6.6 billion; Capital Guardian Trust Co., $6.4 billion; and Wells Fargo & Co.'s Wells Fargo Investment Advisors, $6.3 billion.
These large institutions grew their pension business by cross-selling to corporations with whom they had established relationships in insurance, commercial banking and/or lending.
There were few independent money managers on the 1982 list: Alliance Capital Management Corp. was 10th on the list in 1982, and Fayez Sarofim & Co. was 15th on the list in 1982.
Regardless of their current-day affiliations, Prudential, Morgan (now J.P. Morgan Chase & Co., Fleming Asset Management, TIAA-CREF, Alliance and Capital Guardian are the only firms still in the top 20 in the 2002. Many, however, have merged into new entities, as the family tree has grown a bit complicated in the past 20 years:
* Equitable, the top dog in 1982, stayed in the game by acquiring Alliance Capital in the 1980s and was acquired itself by with AXA Group in the 1990s.
* Morgan created J.P. Morgan Investment Management, which now is J.P. Morgan Fleming Asset Management. Chemical Bank and Manufacturers Hanover merged in the early 1990s, only to be swallowed up by Chase Manhattan Corp., now J.P. Morgan Chase & Co., parent of J.P. Morgan Fleming.
* Bankers Trust was acquired by Deutsche Bank AG, which now also owns what was Zurich Scudder Investments Inc.
* Travelers and Citi-Investments are now playing for the same team as Citigroup Asset Management.
* Crocker Bank was acquired by Wells Fargo, which now owns Wells Capital Management Inc., while Wells Fargo Investment Advisors has evolved into Barclays Global Investors.
* Connecticut General, or CIGNA as is it now known; Mellon; John Hancock; Wells Fargo; and Harris Trust all survive with money management subsidiaries, but at lower rankings.
* Fayez Sarofim also is still around, ranking 69th on the year-end 2001 list.
ERISA starts it all
"The story begins in 1974 with the passage of ERISA," said Dennis Kass, vice chairman at J.P. Morgan Fleming, New York, and former assistant secretary of Labor for pension and welfare benefits. ERISA set in motion the long-term trend toward replacing balanced mandates with investment specialists and boutiques.
As hungry new money managers built assets, they started picking off the best talent from the insurance companies and banks, creating a "brain drain," said Rodger Smith, president of Greenwich Associates, Greenwich, Conn. During the 1970s and 1980s, said Mr. Smith, insurance companies and banks were "the training ground for analysts and portfolio managers."
In many cases, the young talent moved on because the larger financial institutions couldn't match the innovative spirit and pay-for-performance deals that independent money managers were offering.
As the economy crawled out of the 1970s and into the bull market of the '80s, guaranteed investment contracts started to give way to equities. As a result,investment advisers gained ground on insurers, which specialized in GICS.
"The change is really about the impact of the 401(k) industry," said Warren Cormier, president of money manager consultant Boston Research Group, Woburn, Mass. The rise of the equity markets along with the birth of 401(k) plans in the 1980s saw mutual fund companies like Fidelity, Vanguard Group and Putnam Investments Inc. gain market share.
Meanwhile, many of the insurance companies had trouble adapting to the new equity-driven market environment. Some acquired firms that could adapt, some built their own platforms and others merged.
Savings and thrift plans, dominated by GICs, soon evolved into participant-directed plans with 401(k) features, that offered stock and bond investments, said Mr. Smith. As a result, business started migrating to specialty investment managers.
One continuing success story is TIAA-CREF, whose dominance in the college and university market has increased. Scott Budde, director of equity portfolio analytics, said the firm's stable, long-term investment strategy and focus on a marketplace that is known for its stability has enabled it to prosper.
Going for DB plans
SSgA, the largest manager of U.S. institutional tax-exempt assets in 2002 with $556 billion under management, established its dominance by building an investment platform designed primarily for defined benefit plans. The firm built commingled portfolios that mirrored a plan sponsor's asset allocation, said Timothy Harbert, chief executive officer at SSgA.
"We looked to provide investment solutions across a broad spectrum of assets," said Mr. Harbert, delivered in a low-cost, risk-controlled manner, because they understood the fiduciary concerns of plan sponsors.
While assets at SSgA grew at a steady clip throughout the 1990s, Mr. Harbert said that simply building assets was not the goal. "If we offer investment solutions with good client service delivered in an efficient manner, then the assets will come," said Mr. Harbert. Catering to the institutional marketplace is the focus. "This is what State Street does for a living; it's all we do."