Bond advances not enough to stem stock falls

A year of good bond returns was not enough to overcome the sharp shocks from worldwide stock markets for the year ended March 30.

The 178 managers in Pensions & Investments' directory of international and global money managers reported $767 billion in U.S. institutional tax-exempt assets under management in overseas mandates, down 14% from a year ago.

In the same time period, the Morgan Stanley Capital International World index fell 25.3%, while the MSCI Europe Australasia Far East index fell 24.74%. Bond returns for the 12 months ended March 31 were strong, with the Salomon Non-U.S. World Government Bond index up 28.95% and the Salomon World Government Bond index up 25.22%.

Assets managed by the top 50 managers of international accounts fell to $505 billion for the year, a 15.5% drop from the $597.8 billion of the previous year. However, on a market-adjusted basis, international assets were up 4.9%.

Assets managed by the top 50 global managers fell to $144.6 billion for the year, down 5% from $152.5 billion the previous year. On a market-adjusted basis, assets fell 4.6%.

The top 50 international money managers had 87% of their assets in stocks, 7% in bonds, 0.6% in cash and 5.4% of their assets in other investments. The top 50 global money managers had 42.4% of their assets in stocks, 38.9% in bonds, 2.4% in cash and 16.3% of their assets in other investments.

There was uncertainty about the international and global market performance at the start of the year. And although the U.S. market began a sharp upturn in the second quarter, "there are still some humongous challenges outside the U.S.," according to Kevin Rochford, managing director-global sales and client services at Northern Trust Global Investments. The German economy, the largest in the Eurozone, is on the verge of recession, he said, and the SARS illness had taken a toll on Asian markets and Hong Kong in particular. But he thought Asia was beginning to pick up at the end of the second quarter.

The average allocation by U.S. pension plans to overseas accounts essentially stayed the same for the year ended Dec. 31, 2002, and the previous year: 11.9% vs. 12%, according to Richard Qui, research consultant at InterSec Research Corp., Stamford, Conn. However, there was a net outflow of $7 billion from international and global accounts in 2002, a reversal of the $13 billion in money flowing into overseas accounts in 2001. It is the first time since InterSec began tracking the data in 1992 that there has been a negative cash flow in international markets.

Mr. Qui said he thought some international manager hirings were delayed because many pension funds did asset allocation studies last year, trying to figure out the best asset mix in a very difficult investment climate. "We should see more hirings in the first half of 2003," said Mr. Qui, which could mean the money will be flowing into international markets again.

Although emerging market bonds had strong performance in the first half of 2003, the median emerging markets equity return was -19.7% for the year ended March 31, according to Mr. Qui. Although interest in emerging market debt grew in the first quarter and remains a factor, interest in emerging market equities just started to pick up in the second quarter.

Figures from the top 50 international money managers actually show a decline in emerging markets assets for the year ended March 31. Total emerging markets assets held by these managers fell to $36.6 billion, a 12% decline from $41.8 billion the previous year.

In manager rankings, the top five overall spots did not change from the previous survey. State Street Global Advisors, Boston, remained in first place despite an 11.5% decline in overall assets, to $71.6 billion. Capital Guardian Trust Co., Los Angeles, was second, with a 15% decline in assets, to $61.8 billion. Barclays Global Investors, San Francisco, held on to third place, with a 5% decline in assets, to $49.2 billion. Franklin Templeton Investments, San Mateo, Calif., was in fourth, with a 10% decline in assets for the year, to $35.4 billion. Putnam Investments, Boston, came in fifth, with a 14.6% drop in total assets, to $32.1 billion.

Morgan Stanley Investment Management, New York, moved up a notch to sixth place, even though it had an 11.3% decline in assets under management, to $28.4 billion. J.P. Morgan Fleming Asset Management, New York, slipped from sixth to seventh place with a steep 43.4% decline, to $18.6 billion.

J.P. Morgan spokeswoman Carolyn Jones said the sharp decline was due to a change in the firm's reporting methodology. In 2002, the firm included global outsourced assets in its totals; in 2003, the firm only reported international outsourced assets. She said the assets had been "miscategorized" the previous year.

This year's top 10 includes two newcomers. Bridgewater Associates, Westport, Conn., climbed to ninth place, from 15th, with an 8.6% increase in assets, to nearly $17.6 billion. Grantham, Mayo, Van Otterloo, Boston, jumped to 10th place, from 18th, with a 16.2% increase in assets, to $15.9 billion.

"It was a combination of our performance and the popularity of our products," said Raymond Dalio, president and chief executive officer of Bridgewater. The firm had strong returns on its global bond product and also won several new currency overlay mandates last year, he said. "There are many more currency programs in place now than the year before." In addition, "a lot of our strategies are portable alpha, absolute return strategies in which there was a lot of interest." He also pointed out that the firm was stable, with no turnover of key personnel.

Tony Ryan, partner, global business development and client relationships at GMO, also noted that his firm had no key personnel turnover in the past year. The increase in assets was "a combination of new mandates we were awarded last year, including mandates for emerging market equities and some global mandates, and strong returns for the products." GMO had an 18.5% increase, to $14.3 billion, in international assets under management for U.S. institutional tax-exempt clients as of March 31.

Northern Trust managed to buck the losing trend with an overall 65.5% increase in assets, to $14.7 billion, rising to 15th place, from 24th place last year. Much of the increase is due to Northern's acquisition of Deutsche Asset Management's indexing business last year. In addition, Mr. Roche pointed out that the firm won several large mandates from central banks in Asia. Northern Trust had a 128% increase in international assets under management for the year, to almost $7.3 billion. Northern Trust also made the list of the top 50 managers of global accounts for the first time in 2003, with $2.9 billion in assets.

General Motors Asset Management, New York, fell to 12th place from ninth in the overall rankings, with a 29.5% decrease in assets, to $15.6 billion. Jerry Dubrowski, a GM spokesman, said the decline "was mostly a reflection of the market."

Deutsche Asset Management, New York, fell to 17th place, from 10th, with a 38% decrease in overall assets, to $12.9 billion. The main reason for the decline was the sale of its indexing business.

But Deutsche had a 19% increase, to $3.3 billion, in global assets under management. Spokeswoman Judith Inosanto said the increase was due to the integration of the assets from its acquisition of Scudder Investments and inflows into the firm's absolute return strategies.

Goldman Sachs Asset Management, New York, climbed to 18th place in the rankings, from 31st, with a 78% increase in overall assets, to $11.2 billion. This year the company included $7.2 billion from its manager of managers strategy, which hadn't been included before.