The ranks of money managers who garnered billions of dollars from U.S. pension funds investing abroad grew sharply last year, as some traditional heavyweights stumbled and a growing number of other leading players closed capacity-constrained strategies..
Manager profiles, tables, charts
Twenty-two of the top 25 managers of active international securities in Pensions & Investments' latest survey of managers of U.S. institutional tax-exempt assets were in the winners' circle the year before. Capital Guardian Trust Co., Morgan Stanley Investment Management, Franklin Templeton Investments and Grantham, Mayo, van Otterloo & Co. LLC retained the top four spots in the battinTempleton Investments and Grantham, Mayo, van Otterloo & Co. LLC retained the top four spots in the batting order.
That apparent stability masked considerable turmoil in the sector.
U.S. pension funds continued to funnel more money into international equities in 2004, but to an unusual degree there was also "more hiring and firing of managers than we saw in 2003," said Drew E. Lawton, president and chief executive officer of Fidelity Management Trust Co., Boston.
As a result of weak performance or organizational issues, a number of institutional investors fired market leader Capital Guardian as well as traditional marquee names such as Bank of Ireland Asset Management, Putnam Investments and Schroder Investment Management North America Inc.
Capital Guardian's reported assets under management at year-end 2004 in active international strategies rose 7.9% from the year-earlier period, to $97.64 billion. But if the firm had parked all its assets in an index fund benchmarked to the Morgan Stanley Capital International Europe Australasia Far East index, its total at the end of 2004 would have been $108.9 billion. In 2004, the EAFE returned 20.3%; the Citigroup non-dollar World Government Bond index returned 12.1%.
BIAM's active international assets managed internally for U.S. institutional tax-exempt clients tumbled 44% to 17th place, from fifth a year earlier; Schroder slipped 16% to 18th place from 11th place; and Putnam, which had ranked 10th, dropped off the top 25 ranking, with active international assets down 41%.
Terminations add to pot
Those terminations added more than $25 billion to a pot of money that was already bubbling over as U.S. pension funds looked to invest a bigger chunk of their assets abroad during the year.
The growing number of winning managers turning away additional money last year made finding a new home for those assets all the trickier. For example, David Tilles, managing director and chief investment officer of eighth-ranked Mondrian Investment Partners Ltd., London, said his firm closed its $17 billion international multicap equity strategy in mid-2004. Morgan Stanley's international value equity strategy, with roughly $35 billion in assets under management, has been closed since 1995, said Michael S. Green, the head of MSIM's international business.
Against that backdrop, the latest survey's top 25 managers of active international securities reported a 15.5% rise in their combined assets under management in 2004 to $612.6 billion.
That was, however, shy of the indexes; when adjusted for market growth, the top 25's share of the active international securities' pie actually dropped 3.3%.
Overall, international assets reported by all of the managers responding to the current survey rose 17%, but fell 2% on a market-adjusted basis.
Mondrian's Mr. Tilles said the survey numbers might point to greater client interest in midsize and smaller money managers, particularly in owner-operated firms such as Mondrian, LSV Asset Management and Causeway Capital Management LLC.
For the year, Mondrian's active international securities assets jumped 48% to $24 billion, while Causeway's surged 65% to $6.4 billion and LSV enjoyed a nearly four-fold increase to $9.5 billion.
The crush of money looking for a home has clearly left some clients less adamant about the need for three-year or five-year track records. For example, Ben Inker, a principal with Boston-based GMO, said clients entrusted his firm's international growth portfolio, launched in November 2001, with money long before it had a three-year track record. Christopher J. LaCroix, a managing director with Chicago-based LSV, noted that his firm closed its international small-cap VALUE equity product at $1.5 billion before it even reached the three-year mark.
But last year's rising tide lifted big boats as well as small.
Among the bulge-bracket money management firms enjoying stellar growth in active international securities were Boston-based Fidelity Investments, up 66% to $39.7 billion, and New York-based AllianceBernstein Institutional Investment Management, up 52% to $36.7 billion.
Strong performance numbers, a consistent investment process and stable management teams all contributed to Fidelity's more than $15 billion jump in assets last year, said Mr. Lawton. That momentum looks set to continue, he said.
David A. Steyn, head of AllianceBernstein Institutional Investment Management, New York, said his firm's $12.6 billion surge in assets under management last year reflected a new focus among institutional clients on finding "alpha" overseas, rather than simply parking money abroad as a means of diversifying a portfolio. That shift favors the small handful of firms that can field a global organization with a common philosophy, process, culture and tool set, capable of effective bottom-up investing, he said.
Although firms such as Fidelity, AllianceBernstein and GMO did well with strategies that tilted toward growth, most observers said value equity investing remained as dominant overseas last year as it has been domestically for the past five years.
"We've seen a dramatic increase in the international value area in particular," said Patrick Sheppard, president and chief operating officer with The Boston Co. Asset Management. Parent company Mellon Financial Corp. saw its active international equity assets under management jump 52% to $14.5 billion, although a shift in global bond portfolios from overseas to U.S. paper left the firm's overall assets in international securities up 23% at $15.2 billion.
Representatives for Franklin Templeton, in third place, and T. Rowe Price Associates Inc., in 25th place, cited outflows from their international growth equity products as a factor behind their weaker numbers. Franklin Templeton's U.S. institutional tax-exempt assets in active international strategies climbed 8.8% to $44.5 billion, while T. Rowe Price's assets feTempleton, in third place, and T. Rowe Price Associates Inc., in 25th place, cited outflows from their international growth equity products as a factor behind their weaker numbers. Franklin Templeton's U.S. institutional tax-exempt assets in active international strategies climbed 8.8% to $44.5 billion, while T. Rowe Price's assets feTempleton's U.S. institutional tax-exempt assets in active international strategies climbed 8.8% to $44.5 billion, while T. Rowe Price's assets fell 1.4%.
Newcomers to the winners' ranking in 2004 were INVESCO, up to 23rd place from 26th; JPMorgan Asset Management, rising to 21st place from 28th; and Bridgewater Associates Inc., in 24th place from 26th.