While managers continued to garner money, there were signs they were finding it difficult to navigate last years second-half turmoil: The top 500s internally managed U.S. institutional tax-exempt assets declined 2.5% on a market-adjusted basis.
Still, a number of trends from prior years continued, including shifts out of domestic equity in favor of international securities and alternatives strategies.
Internally managed U.S. institutional tax-exempt assets in active domestic equities fell 2.1% to $2.176 trillion and international assets jumped 21.4% to $2.017 trillion. (The active domestic equities figure was adjusted down from the survey total of $2.348 trillion, to account for the fact that Capital Research & Management Co., Los Angeles, reported $172 billion for that asset class in the latest survey, but didnt break out numbers in previous years.)
That decline comes as no surprise, noted Casey Quirks Mr. Itah, who said his firms database showed institutional investors pulling more than $100 billion out of domestic equity in 2007, while boosting international and global holdings.
Elsewhere, active domestic bonds rose 4% to $1.775 trillion and indexed assets including domestic and foreign stocks, bonds and exchange-traded funds rose 6% to $2.31 trillion.
Asked about the jump in indexed assets, executives with SSgA and Barclays Global Investors, San Francisco, said last years market volatility helped boost demand for passive, or beta, strategies. SSgA remained the top manager in 2007, with $1.766 trillion in worldwide institutional assets; BGI remained second, with $1.579 trillion.
The difficult environment prompted investors to flock back to beta, noted SSgAs Mr. Brown. With its 11 investment centers around the globe, that move blended with growing interest among U.S. clients in boosting their foreign holdings to lift SSgAs non-U.S. equity beta assets under management more than 12%.
Beta was far from the entire story for SSgA last year, with the firm well positioned to help plan executives respond to a number of challenges, including the shift to defined contribution plans from defined benefit plans, the search for uncorrelated alpha and the move toward liability-driven investing, Mr. Brown said. SSgAs active international equity assets under management surged 34% last year to $34.3 billion, with emerging markets and 130/30 strategies enjoying strong growth, he said.
Disappointing returns for active strategies sparked renewed interest in indexing, agreed Matthew H. Scanlan, managing director and head of Americas institutional business with BGI. That resurgence in beta has been aided by the introduction of more exotic betas, such as BGIs strategies providing passive exposure to emerging and frontier markets, he said.
Mr. Scanlan also cited growth in defined contribution assets, fueled by the October 2006 passage of the Pension Protection Act, as a key driver for BGIs institutional asset growth in 2007. That legislations blessing of target-date and lifecycle funds as qualified default investment alternatives for DC plans has prompted plan sponsors to adopt them en masse, helping to fuel an 18% jump in BGIs DC assets last year, he said.
P&Is survey data confirm that trend, showing internally managed U.S. institutional defined contribution assets jumping 12%, while defined benefit assets edged up a scant 1.6%.
Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based investment consulting firm Cliffwater LLC, said his data show a net cash outflow for S&P 500 company defined benefit plans of 4% to 5% a year, which would account for the marginal gains for DB assets in a year when major U.S. equity markets gained between 5% and 6%.
With more companies freezing their DB plans and demographic trends poised to ratchet up the pace of distributions, the pattern of DC growth outpacing DB should persist, said Scott David, president of retirement services for Boston-based Fidelity Investments personal workplace and investing division.
Mr. David said demand in the DC market for Fidelitys Freedom family of asset allocation, or target-date, funds helped his firm retain third place in the latest P&I survey, with $1.045 trillion in worldwide institutional assets. At the end of the first full year following passage of the PPA, roughly 50% of our plan sponsors have opted for an asset allocation fund as a default, and those adoption rates are accelerating, he said.
During 2007, assets in Fidelitys asset allocation funds surged 21% to $94.7 billion, while the firms international offerings enjoyed a strong 16% gain as well, he said.