U.S. firms taking a bigger bite out of European pie

LONDON — U.S.-based money managers are grabbing a growing slice of the European institutional pension market, a trend that is expected to continue over the next few years, according to a report on the European asset management industry.

Huw van Steenis, asset management and diversified financials analyst at Morgan Stanley & Co. International Ltd., London, and author of the report, sees the greatest opportunities for foreign money managers to gather assets in the Netherlands, Germany, Switzerland, Sweden and the rest of the Nordic countries.

Also, the increased focus of European plans on liability management and yield enhancement should be a boon to specialist managers including Barclays Global Investors, San Francisco; State Street Global Advisors, Boston; Northern Trust Corp., Chicago; Pacific Investment Management Co., Newport Beach, Calif.; and Goldman Sachs Asset Management, New York. In an e-mail response to a question, Mr. Van Steenis explained BGI, SSgA, Northern and GSAM have developed a good reputation for low-cost, well risk-managed quantitative strategies. PIMCO has developed a good book of fixed-income and liability-matching business, he added.

For example, trends in the Dutch market are toward higher-yielding investment strategies, liability-led investing and greater use of enhanced indexation. That reflects thinking in other parts of continental Europe as well, including Switzerland and the Nordic countries.

A number of Dutch plans were adopting a ground-breaking investment strategy mix of one-third passive, one-third enhanced index and one-third actively managed, said Mr. Van Steenis, but he would not name the plans.

A wide range of U.S. money managers — including PIMCO, BGI, GSAM and Merrill Lynch Investment Managers, Plainsboro, N.J. — will benefit as continental European plans search for alpha and, as a result, increase their allocations to property, commodities, private equity, hedge funds, higher yielding bonds and more specialized credit strategies. The use of enhanced indexing strategies is likely to increase with BGI, Northern Trust, SSgA, Merrill Lynch and Vanguard Group, Malvern, Pa., poised to benefit. These managers not only are well-known indexers, but also have been actively marketing in the Benelux countries.

New pension funding rules due next January, and including a solvency test will encourage Dutch pension plans to use inflation-linked bonds and interest-rate hedging strategies (Pensions & Investments, April 4). Chief beneficiaries of this trend are likely to be PIMCO, Merrill Lynch, BGI and GSAM, according to Mr. Van Steenis' report.

Anecdotal reports during Mr. Van Steenis' interviews with money managers active in the German market suggest international specialist firms have won up to a third of existing mandates since rules were relaxed on the use of external money managers in Kapitalanlagegesellschaften, or KAGs, the main investment vehicle for local pension plans, in late 2003. Mr. Van Steenis estimates international money managers were responsible for 12% of pension assets by the end of 2004.

According to the report, international specialists' penetration of the Swiss and Nordic markets is estimated to be around 15% of institutional mandates each.

In the United Kingdom, international specialist money managers run 50% of plan assets and there is little sign that their share of the market will increase much more, the report said. But asset allocation is changing significantly among U.K. plans as they drop balanced mandates, issue global bond and equity mandates, seek style neutrality and rebalance investment portfolios. Mr. Van Steenis believes there are opportunities for specialist and boutique money managers.

"Only those firms with a suitable portfolio of specialist mandates can withstand this change. Many firms are seeking to tune-up their investment engines by widening tracking errors and targeted returns and tweaking appropriate benchmarks.

"We also see firms seeking to take out the complexity of a global and regional firm and instead emulate a more boutique feel," he said.