The largest 25 managers of mutual fund assets in defined contribution plans saw assets decline 10.2% in 2002 to $742.9 billion.
For firms that manage mostly equities for a living, staying above water was difficult in a year when the Standard & Poor's 500 index was down 22.1%. Seven of the 10 largest firms saw assets decline; only Capital Research & Management Co., Los Angeles; Pacific Investment Management Co., Newport Beach, Calif.; and Prudential Financial Inc., Newark, N.J.; reported more defined contribution mutual fund assets, according to data collected by Pensions & Investments.
Despite a 12% decrease, Fidelity Investments Inc., Boston, remained the dominant player with $251.4 billion in defined contribution mutual fund assets. Five of the 10 largest mutual funds - equity and bond - in the Pensions & Investment universe of funds most used by defined contribution plans are Fidelity funds, led by Fidelity Magellan, managed by Robert Stansky. Despite the fact that it was overtaken by the PIMCO Total Return and Vanguard 500 Index funds in overall assets, Fidelity Magellan remained the largest fund in the P&I universe, with $38 billion in defined contribution plan assets. The $38 billion represents a decline of 26% for Magellan in calendar year 2002. Vanguard 500 was second for 2002 with $18.3 billion, while the PIMCO Total Return fund, managed by William Gross, was third with $16.9 billion.
Rounding out the top five were the $16.3 billion Fidelity Contrafund and the $13.3 billion Fidelity Growth & Income Fund.
"Fared pretty well"
"Given that this was the third down year in the market, the asset base fared pretty well," said Jane Jamieson, executive vice president at Fidelity Employer Services Co., which oversees the firm's defined contribution arm. From a sales standpoint, it was a solid year on par with 2001, said Ms. Jamieson. Fidelity got a boost from its fixed-income funds as well as the total benefits outsourcing business, which brought in some new large-plan clients.
These areas helped offset some declines by the firm's growth-oriented funds. Fidelity's Magellan, Growth Company, OTC Portfolio and Blue Chip Growth funds declined 26%, 34%, 27% and 25%, respectively in defined contribution assets. "We did see exchange activity pick up in the middle of the year," said Ms. Jamieson, as assets flowed out of some of the more aggressive equity funds.
But overall, flows into equity funds held up as other offerings picked up the slack. Assets in the Fidelity Low-Priced Stock Fund, managed by Joel Tillinghast, increased 33%, to just less than $8 billion, while the Fidelity Value Fund, managed by Rich Fentin, increased 1% to $1.6 billion. The $16.3 billion Fidelity Contrafund, managed by William Danoff, also held up reasonably well, losing 11.9% of its assets. Contrafund is the third largest equity fund. Other Fidelity funds in the top 10 equity funds are the Growth & Income Fund with $13.3 billion, the Fidelity Equity-Income Fund with $12 billion and Fidelity Spartan U.S. Equity Index with $10.9 billion.
The second largest manager of mutual fund assets in defined contribution plans, the Vanguard Group Inc., Malvern, Pa., saw assets decline 12.6% in 2002 to $115.3 billion. Competitive returns and a balanced book of business helped Vanguard's assets hold up in 2002, said Gerard Mullane, principal and head of the institutional investor group at Vanguard.
The flagship Vanguard 500 Index fund lost about 20% of its assets, falling to $18.3 billion. But Vanguard's second-largest fund, Vanguard Institutional Index, increased 31% to almost $12.6 billion, making it No. 6 in the equity fund rankings. The increase can be attributed to the fact that assets of the Vanguard Institutional Index Plus fund, which had $6.6 billion as of Dec. 31, 2001, were rolled into the Vanguard Institutional Index fund.
A good year
From a business perspective, 2002 was among the firm's best years on the defined contribution side, said Mr. Mullane. DC business brought $15 billion in new assets, with $10 billion coming from the full-service record-keeping business and $5 billion in investment-only mutual fund assets. Despite another year of declining stock markets, Mr. Mullane said the firm hasn't seen much movement away from index funds by plan participants.
"It's the never-have-to-say-I'm-sorry option," said Mr. Mullane, because index managers don't have to explain to participants why returns are down. Participants realize what they're getting, index funds remain fixtures in defined contribution plans, he added.
Overall, there hasn't been a lot of exchange activity given the volatile markets. "Participants have been incredibly resilient," said Mr. Mullane. "We have not seen a lot of trading activity," he said, adding 86% of participants surveyed by Vanguard did not make a single strategic shift last year. The 14% that did, primarily went to fixed-income from equity funds, he said.
Capital Research & Management was one of just a handful of firms to see assets increase in 2002. Capital Research, which runs the American Funds, saw assets increase 0.6% to $83.5 billion.
Assets in the firm's largest fund, Growth Fund of America, increased 9.5% to $12.6 billion. The fund, No. 5 in the P&I equity universe, was the only top 10 equity fund with an increase in assets. Other American Funds in the top 10, Washington Mutual and Investment Company of America, saw modest asset declines. The $11.5 billion Washington Mutual fund, No. 8 in the P&I equity universe, lost 3% of assets; the Investment Company of America, the 10th largest, lost 6.7% of its assets last year.
Drew Taylor, vice president at Capital Research, said the firm's conservative, value-oriented, long-term investing focus has helped it weather the storm better than most. "Being conservative didn't do us any favors in 1999 when the stock market was running straight to the moon," he said. "But it has enabled us to maintain assets in this environment. Keeping as much of your serious money in this environment is as important as making money in a good market."
Also, he said, the portfolio managers' willingness to hold cash has been beneficial. "Cash is not a bad thing," said Mr. Taylor. "If you're looking at the market and not finding value, instead of forcing the issue and buying something you don't like, go into cash," said Mr. Taylor. Many of the funds have 10% of the portfolio in cash, he added.
T. Rowe Price Group Inc., Baltimore, continued its move up in the rankings in 2002, leapfrogging over Putnam Investments Inc., Boston, into fourth on the list of the largest managers of mutual fund assets in defined contribution plans. In 2001, it had pushed Janus Capital Management, Denver, out of fifth place.
T. Rowe Price saw assets drop 14% to $29.965 billion. Putnam's assets fell 25% in 2002 to $29.9 billion.
Charles Vieth, president of T. Rowe Price Retirement Plan Services, said the strength of the firm's investment performance is carrying it through the down market. "We stuck to our long-term approach," said Mr. Vieth, who added that two-thirds of T. Rowe's funds are ranked four or five stars by Morningstar Inc., Chicago.
Mr. Vieth said the firm also has seen some interest by plan participants in the lineup of asset allocation funds launched last year. Many plan participants are migrating toward the vehicles from traditional equity funds and company stock. "A lot of plan sponsors are looking at the role company stock plays in their plan," said Mr. Vieth.
John Brown, head of institutional management at Putnam, said much of the firm's decrease could be attributed to two factors: market depreciation and a shift from equities into stable value investments. "This is not a Putnam phenomenon, this is an industry phenomenon," he said.
Joseph Craven, director of institutional retirement services at Putnam, said it's not unusual to see a client that has a third of its assets shifted into stable value investments.
Additionally, Putnam's adoption of open architecture in its bundled defined contribution platform has led to some asset drain - some plan participants opted to diversify holdings with mutual funds managed by other money management firms, said Mr. Brown.
Putnam is anticipating much interest in its recently launched asset allocation funds, said Mr. Brown. The nine age-based funds are made up of six Putnam mutual funds. Mr. Brown also anticipates improvements to performance in the large-cap growth and specialty growth asset classes, where recent portfolio management changes have occurred. International and core equity funds have performed well, said Mr. Brown, citing the firm's largest fund in the P&I universe, the Voyager Fund, which lost 7.6% of its assets in 2002. The Voyager Fund, with $5.6 billion of assets in defined contribution plans, is the 19th largest fund in the P&I universe. The next largest fund, Putnam New Opportunities, lost 36% of its defined contribution assets in 2002, dropping it to $2.9 billion.
Janus Capital Management, Denver, remained sixth in the rankings with $23.8 billion in defined contribution mutual fund assets, a drop of 28% in 2002.
Merrill Lynch Investment Management, New York, is seventh with $21.2 billion, a decline of 9% in 2002.
By far the biggest gainer in 2002 was PIMCO, where assets increased 69% in 2002 to $20.6 billion. Three-quarters of PIMCO's defined contribution mutual fund assets can be found in the $16.9 billion PIMCO Total Return Fund, the largest-fixed income fund in the P&I universe and third largest fund overall. In 2002 alone, the Total Return Fund increased a whopping 74% to $16.9 billion.
Greg Bishop, senior vice president at PIMCO, said PIMCO benefited from the shift into fixed-income investments from equities. Plan participants, like retail investors, tend to chase performance and in 2002 they found it in fixed-income funds, added Mr. Bishop.
However, he said, the shift is more a return to normalcy than an anomaly. "Ten or 15 years ago, the majority of DC assets were invested in fixed-income and stable value funds," said Mr. Bishop. "Then we saw a huge move into equities during the bull market, which was a classic over-shoot." The shift back into fixed income and stable value represents an adjustment to a more traditional asset allocation mix, he added.
Strong brand name
PIMCO enjoyed a great deal of success in 2002 because of its performance and its strong brand name, said Mr. Bishop. The PIMCO brand has created strong demand for PIMCO funds in a fixed-income market overshadowed by the equity market in recent years, he added. "There are fewer well developed brands as it would relate to the individual investor," said Mr. Bishop. "PIMCO is surely one of those names."
Performance and brand recognition is that much more important given the fact that PIMCO is not a bundled provider and relies on other providers, consultants and plan sponsors to get on defined contribution platforms, added Mr. Bishop. PIMCO has been aided by the fact that many large full-service providers were willing to open their platforms to fixed income managers during the bull market when fixed income was largely an afterthought. "We were happy to fill that role," said Mr. Bishop. Now the firm is positioned to be a direct beneficiary of the asset allocation shift to bonds.
Overall, fixed-income assets in defined contribution plans increased 32% to $72.8 billion according to P&I data. In contrast, equity fund assets declined 18% to $355 billion.
The second largest fixed income fund in the P&I universe is the Vanguard Total Market Bond Index Fund, which saw assets increase 82% to $7.1 billion.
The third largest fund is the American Funds Bond Fund of America with $4.5 billion, an increase of 15% in 2002.