Assets rise 6% to hit $8.78 trillion

Money managers' U.S. internally managed institutional tax-exempt assets swung 6% higher in 2004, to $8.78 trillion, according to Pensions & Investments' annual survey.

The appreciation, however, pales in comparison to the overall market performance. On a market-adjusted basis, the largest 500 managers' U.S. internally managed institutional tax-exempt assets lost nearly 2%.

(The Russell 3000 stock index jumped 11.95% in 2004 and the Morgan Stanley Capital International Europe Australasia Far East index rose 20.25%. Also during the year, the Citigroup Broad Investment Grade bond index rose 4.48% and the Citigroup World Government Bond index rose 12.14%.)

Worldwide institutional assets under management by the 760 managers surveyed jumped 14.7% to $19.07 trillion from $16.62 trillion last year. Managers' total worldwide assets jumped 15% to $28.73 trillion from $24.9 trillion in 2003.

Consultants cited several factors shaping 2004's performance. Looking at the big picture, they said, the year saw money managers running their businesses against the backdrop of presidential election uncertainty as well as rising interest rates and oil prices.

In a year that the integrated oils sector of the Russell 1000 index was up 28.5%, "that (presents) a big headwind for a lot of managers," said Mark Eibel, head of U.S. equity manager research at Russell Investment Group, Tacoma, Wash.

Consultants also noted institutional investors have been making big changes to their asset allocations, lured by the intoxicating returns of hedge funds and other alternative vehicles during the past several years. Their increased interest is stoked by the need to improve returns. Most long-only equity and fixed-income managers, which make up the majority of respondents in the P&I survey, have been slow to enter the alternatives marketplace.

"The one shift we keep hearing about is plan sponsors moving and replacing traditional, active fixed income with alternative products, so that's eating into the share that active fixed-income managers have," said David Eager, partner at Eager & Davis LLC, Louisville, Ky.

Institutional investors "want their assets to work harder than a 4% Treasury (return) will do for them," Mr. Eager said.

Indeed, bullish enthusiasm for alternative products is seen in adjustments to the average asset mix of the top 500 managers' internally managed U.S. institutional tax-exempt assets, according to the P&I survey.

Among the 500 largest, real estate rose to 2.6% of managers' assets from 2.4% a year earlier; "other," a category that includes alternatives, rose to 3.5% from 3%; and stocks increased to 52.7% from 50.8%. Bonds lightened to 30.2% from 32% in the same period, while cash holdings fell to 11% from 11.8%.

Those changes are supported by a February survey from Greenwich Associates, Greenwich, Conn., showing that hedge funds represented 1.6% of institutional assets in 2004, or an estimated $90 billion, up from 1.3% in 2003. Meanwhile, the average fixed-income allocation among U.S. funds fell to 23.7% in 2004 of total portfolio assets from 26.8% in 2003.

Search activity reinforces the rush for alternatives. In the first quarter of 2005, there were 130 announced searches for alternatives managers, compared with 52 in the first quarter of 2004, according to the Tracker database run by Holmes Research LLC, Louisville, Ky. The 130 searches represented 38% of all publicly announced manager hunts.

In the institutional universe, powerhouse State Street Global Advisors Inc., Boston, once again took the title as the largest money manager in all three rankings — worldwide institutional assets, U.S. institutional tax-exempt assets and U.S. institutional tax-exempt assets managed internally. In those three rankings, Barclays Global Investors Inc., San Francisco, and Fidelity Investments Inc., Boston, held firm in their second and third place spots, respectively.

Mellon Financial Corp., Pittsburgh, also was in the top five on all three lists. In the U.S. institutional tax-exempt rankings, Northern Trust Global Investments, Chicago, maintained its No. 4 spot.

New to the top 10 list of managers ranked by total worldwide institutional assets is JPMorgan Asset Management, New York, which ranked eighth, up from 11th place last year. The jump was due to the acquisition by JPMorgan's parent of Banc One Corp.; Banc One Investment Advisors Corp. had ranked 35th in the year-earlier survey.

Overall, an increased appetite for enhanced index strategies was contributing to gains at SSgA and BGI, leaders in benchmark-tracking products. Seeking alpha, more clients are making that move to enhanced index from passive products.

More than 70% of State Street Global Advisors' new revenue was generated from non-passive mandates in 2004, said Sean Flannery, SSgA'sNorth American chief investment officer.

SSgA's worldwide enhanced assets grew to $61.5 billion at the end of 2004 from $33.5 billion the previous year. This represented an 83% increase. For U.S. institutional tax-exempt clients, enhanced index equity assets rose 65.5%, to $20 billion.

The Boston firm's U.S. institutional tax-exempt assets jumped 5.6% to $765.7 billion at year-end 2004. Total worldwide institutional assets under management hit $1.3 trillion at the end of 2004, a jump of 19.9%, helped by its international footprint.

"We have 11 investment centers around the world … and we have invested in them for a long time and are seeing a tremendous amount of assets from outside the U.S," Mr. Flannery said.

Additionally, business has been aided by a "flight to quality," after the mutual fund trading scandals, he said.

Total worldwide asset growth for SSgA remains healthy in 2005, Mr. Flannery said. "We're well on pace to have another record-setting year," he said.

BGI, SSgA's closest rival, had a strong year in strategies across the board, said Kathy Taylor, managing director for U.S. institutional business. The firm logged $1.17 trillion in worldwide institutional assets and $651.96 billion in U.S. institutional tax-exempt assets at the end of 2004. That is up 22% and 14%, respectively, from the year-earlier period.

"We saw continued growth in our enhanced equity index products, both domestically and internationally," Ms. Taylor said. BGI reported an increase of 16% in its U.S. institutional tax-exempt assets in enhanced equity strategies; domestic enhanced was up 12% while international was up 30%.

She also noted there was "a lot more interest" in BGI's lifestyle portfolios from its defined contribution client base. BGI reported a 10% increase in DC assets at year-end 2004.

Fidelity also received a boost from its defined contribution business. The firm managed $809.6 billion in worldwide institutional assets and $504.6 billion in U.S. tax-exempt institutional assets at the end of 2004, up 11% and 13%, respectively. It reported $419.59 billion in defined contribution assets, up 17% from the year earlier.

"In the defined contribution space, Fidelity really addresses all market segments," said Bill Carey, president of Fidelity Institutional Retirement Services Co., a division of Fidelity Investments. "We have a significant leadership position in the small market space, as well as with medium and large companies."

The small market, which encompasses companies with 1,000 and fewer employees, contributed $3.3 billion to Fidelity's mutual fund net sales last year (among its funds that are used in defined contribution plans), he said. Much of the activity has been driven by consolidation in the defined contribution market, as well as "due diligence" types of searches from companies seeking a new manager, Mr. Carey added.

At Northern Trust, the company's indexing business continues to grow by leaps and bounds as investors seek to separate their alpha from beta, said Terry Toth, president. At the end of 2004, Northern had $198.5 billion in worldwide indexed assets under management, compared with $60 billion at the end of 2002. that growth was helped by the acquisition of $70 billion in U.S. indexed assets from Deutsche Bank AG, Frankfurt, in 2002, he said.

Hedge funds represent another growth area for Northern Trust, as assets in this alternative class managed for U.S. institutional tax-exempt clients were $1.1 billion at the end up 2004, more than three times the figure reported a year earlier.

Overall, Northern Trust's U.S. institutional tax-exempt assets hit $411.76 billion in 2004, an increase of 20% from 2003. "It is our best year of asset growth without having an acquisition," Mr. Toth said.

In other survey highlights:

• The average asset mix overall for managers at year-end 2004 was 52.7% stocks, 30.1% bonds, 10.9% cash, 2.7% real estate and 3.6% other. That compares with year-earlier figures of 50.8%, 31.9%, 11.7%, 2.4% and 3.2%, respectively.

• The managers profiled in this directory employed 12,336 portfolio managers, down from 12,472 last year. Managers had 10,045 research analysts, up from 9,636 in 2003.