Consultants said no single trend drove the growth, but there seemed to be particular interest in enhanced indexed and hedge fund strategies in an effort to boost alpha. Those trends are continuing in 2004, the consultants added.
Tim Barron, managing director of investment research at CRA RogersCasey, Darien, Conn., observed: "We've seen a lot of search activity in 2003, which was probably 30% busier than it was in 2002, and it's not been dominated by any one trend. There have been modest numbers of searches in fixed income and international equity, while it's been pretty darn busy in the domestic equity category, particularly in small-cap, where there's been more interest in growth than value."
He attributed the heightened search activity to increased pension contributions and institutions shifting from firms that had been involved in the mutual fund scandals.
John Casey, chairman of Casey, Quirk & Acito LLC, Darien, Conn., emphasized that investors were looking for quality in their managers after the stock market bubble of 2000: "They want to be investing with firms that pass the quality test and that haven't been affected by the scandals."
He's also observed that there is increased interest in alternatives, particularly hedge funds, and that pension funds seem to be moving some money out of fixed income and into alternatives to improve returns. He predicted: "In 2004, another $80 (billion) to $100 billion could flow into alternatives, with two-thirds of that moving into hedge funds. The trend is in place to make these moves, but it's questionable whether there is enough capacity in hedge funds to implement it," he noted.
The asset management powerhouses of State Street Global Advisors, Barclays Global Investors NA and Fidelity Investments retained their 1-2-3 finish in all three rankings — worldwide institutional assets, U.S. institutional tax-exempt assets and U.S. institutional tax-exempt assets managed internally.
Moving into the top five on all three lists was Mellon Financial Corp., Boston, which for this survey consolidated the assets of its affiliates. Previously they had been reported separately.
In the U.S. institutional rankings, Northern Trust Global Investors, Chicago, moved up to fourth from sixth in 2002, helped in part by its acquisition of the $65 billion in U.S. indexed assets from Deutsche Bank AG, Frankfurt.
New to the top 10 list of managers ranked by U.S. institutional tax-exempt assets this year is Legg Mason Inc., Baltimore, which ranked ninth, up from 11th place in 2002.
Merrill Lynch Investment Managers, Plainsboro, N.J., slipped to 27th place from seventh place because of a reporting error on last year's survey, said a company spokesman who declined to be named. And New York-based Deutsche Asset Management fell to 28th place from eighth following the sale of the indexed asset business to Northern Trust.
Increased allocations to enhanced indexed funds was behind the growth at the top two money managers.
Tim Harbert, chairman and chief executive officer at Boston-based State Street Global, said: "In the past two years we've made a concerted effort to increase our enhanced index and active management businesses. That strategy helped us gain larger commitments in 2003 both from existing clients and new clients, who weren't just buying passive mandates. Our annual revenues in 2003 were evenly split, so that one-third went to passive mandates; one-third to active and one-third to enhanced."
State Street's internally managed U.S. institutional tax-exempt assets grew 42.3% to $719.3 billion.
By cross-selling to clients across the risk-return spectrum, SSgA realized increased business from existing clients, Mr. Harbert added. Currently 950 of the firm's clients are using two or more strategies. Around 70% of the new business came from existing clients, but the firm also added 250 new clients during the year. "We saw a lot of switching from passive to enhanced strategies among clients. Also clients with underperforming active managers who weren't meeting their return expectations switched into enhanced indexed strategies," he said.
The growth story was somewhat similar at San Francisco-based BGI, whose internally managed assets grew 40%, to $569.7 billion. Kathy Taylor, managing director for U.S. institutional business, said: "Most of our growth was in our risk-controlled products — especially in the U.S. enhanced equity indexed strategies, as well as in hedge fund products such as market neutral and long-short strategies. We also experienced good growth in our U.S. core active and core-plus fixed income funds."
There is a search for alpha to close the pension funding gap, so pension funds have been looking for ways to add money in their risk-controlled strategies, Ms. Taylor added. If they can't increase their risk budgets, they are moving some money from traditional active managers to enhanced indexed strategies, and at the same time they might move some money into hedge funds.
There has also been movement from straight indexed funds into enhanced indexed strategies, Ms. Taylor noted. Additionally, there has been growth in Barclays international equity enhanced index strategies and currency overlay strategies, she said.
There has also been a flight to quality, a trend that has accelerated after the trading scandals. Noted Ms. Taylor: "We've gotten some new business from that, and see the growth continuing into 2004. It's being driven by good performance in our products, and our culture of integrity."
At Fidelity, much of the growth in assets came from the 401(k) plans managed by the firm, said Bill Carey, president of Fidelity Institutional Retirement Services Co., Boston, a unit of Fidelity Investments. "Many of the individual investors enrolled in the plans moved into equities from more conservative stable value and fixed-income strategies," Mr. Carey said. Fidelity's internally managed assets grew 32.3%, to $446.9 billion.
Northern Trust's 2003 acquisition of Deutsche's indexed business was a major boost, said Terry Toth, president. "But the firm also took in $40 billion in new index business, as well as $5.4 billion in its manager-of-managers, hedge fund-of-funds and short-duration fixed-income businesses.
Mr. Toth also noted there has been an increased interest in the enhanced indexed business and in hedge funds. "I haven't seen a lot of changes in asset allocations. As the equity markets rallied, pension funds have had to trim back to their target allocations. But there has been a lot of movement toward enhanced strategies from basic indexed strategies, because they can deliver an additional 100 basis points."
Patrick Sheppard, chief operating officer at Mellon Institutional Asset Management, Boston, said about 75% of the firm's asset growth came from market appreciation. The remainder came from a pickup in international and emerging market mandates, hedge fund strategies and increases in the passively managed business, he added. There was also growth in small and midcap value strategies.
In other highlights of the survey:
-- The average asset mix of the managers' U.S. institutional tax-exempt assets at year-end 2003 was 50.8% equities; 31.9% bonds; 11.7% cash; 2.4% real estate; and 3.2% other. A year earlier, it was 46.5% equities; 36.4% bonds; 11% cash; 2.5% real estate; and 3.6% other.
-- Among the 500 largest managers, the asset mix was 50.8% equities; 32% bonds; 11.8% cash; 2.4% real estate and 3% other. That compares with year-earlier figures of 46.4%, 36.5%, 11%, 2.5% and 3.6%, respectively.
-- The managers profiled in this directory employed 12,472 portfolio managers and 9,636 people in research, up from 12,085 and 8,835 respectively, a year earlier.
-- They collectively reported $1.85 trillion in assets under management in active domestic equity strategies; $1.74 trillion in active domestic bonds; $1.73 trillion in indexed assets; and $988.9 billion in international assets.