Manager assets up 9%

Barclays Global Investors is the world's largest money manager, topping the $2 trillion mark in worldwide assets under management for the first time, according to the Pensions & Investments/Watson Wyatt Worldwide annual ranking.

BGI reported a 14.6% increase at $2.08 trillion as of Dec. 31, 2007. State Street Global Advisors rose 13.2% to second from third place with $1.98 trillion, while Allianz Group regained its third-place position with a 14.6% hike to $1.96 trillion after having fallen to fifth place in the previous ranking.

Total assets under management for the P&I/Watson Wyatt World 500 ranking of the world's largest managers rose 8.9% in 2007, to $69.4 trillion, compared with an increase of 18.9% the previous year.

“On the surface, 2007 looks like a standard year — not great, but not bad,” said Craig Baker, senior investment consultant and global head of manager research at Watson Wyatt Worldwide, Reigate, England. “In reality, however, this masks some of the volatility that was seen.”

The boost in assets was largely powered by equity market performance in the first nine months of 2007, Mr. Baker said. Toward the end of the year, however, this trend started to reverse and, of course, has continued its downward trend into 2008. The Standard & Poor's 500 index, for example, returned 6.9% in the first half of 2007 but only 3.5% for the year.

The relative weakness of the dollar and outperformance of certain international stock markets against the United States lifted assets for managers operating overseas. The rate of pure asset growth in non-U.S. regions helped geographically diverse managers as well as some home-grown players in developing markets. Squeezed in between are established regional firms built on a mainly domestic client base. For example, London-based F&C Asset Management PLC has a mostly U.K. client base. In 2007, F&C fell to 89th place with $206.1 billion in assets under management from 80th place at year-end 2006 with $203.8 billion in assets.

“Most of the managers in the top 20 are pretty global, some more global than others,” Mr. Baker said in an interview. “Certainly this has been a big advantage in terms of pure asset growth.”

Assets under management for the top 20 managers increased by 5.6% in 2007, while their share as a percentage of total assets for all 500 firms fell to 37.5% from 38.7% a year earlier. The drop is due primarily to a methodology change in which only discretionary assets under management are considered. In previous years, such data were not separated from other assets under advisory agreements by some managers. The change also led to a sharp fall in ranking for several top managers — including Zurich-based UBS AG. After leading for seven years, UBS ranked 10th at year-end 2007 with $1.23 trillion. Credit Suisse Group, also based in Zurich, dropped 18 notches to 29th, with $614 billion in assets under management.

In a comparison of discretionary assets from 2006 to 2007, UBS' assets under management actually rose 16% from $1.05 trillion in 2006, according to data provided by UBS.

“A key strategic direction for UBS Global AM over the past few years has been the development of our diversified business model,” said spokeswoman Sarah Small. “In 2007, we addressed performance issues in certain traditional strategies through leadership and personnel changes ... In 2008, despite the difficult environment for the asset management industry generally, UBS Global AM is seeing the benefits of (those measures and the) diversified model.”

In particular, the Swiss institutional market, the Japanese wholesale business and UBS' passive strategies have all experienced significant asset growth in the past year, Ms. Small added.

San Francisco-based BGI's assets under management also swelled from its diversification efforts over the years. The firm benefited from several key client trends in 2007 — a shift into quantitative strategies, growth in passive investments and a move to alternatives, according to Watson Wyatt consultants and other managers. In addition, the firm remains a force in enhanced index equity and fixed-income strategies.

As a percentage of BGI's total assets, 56% is from the U.S. and 27% is from Europe, while the remainder is from Australia, Japan and other markets, according to data as of Dec. 31, 2007. Alternatives account for about 17% of the overall assets under management.

Matthew Scanlan, San Francisco-based managing director and head of Americas institutional business for BGI, said the firm has been deliberate in building its business to capture institutional and retail investment trends. For example, the firm made a move into alternatives in 1996, when it had just a small footprint in sectors such as hedge funds, Mr. Scanlan said in an interview.

“That business is now in excess of $30 billion,” Mr. Scanlan said. “We also extended our defined contribution business at precisely the right time, when plan sponsors were beginning to move away from defined benefit plans. ... We introduced the industry's first lifecycle fund, LifePath.

Despite the dollar's relative weakness to the pound and the euro in 2007, U.S.-based managers reaffirmed their dominance among the top 20 managers: 11 U.S.-based firms managed 53.2% of that group's aggregate $26 trillion in assets under management. At the end of 2006, there were nine U.S.-based managers accounting for 43.7% of the assets under management by the 20 largest firms, according to an analysis by Watson Wyatt. The figures for U.S.-based firms do not include BGI because it has a U.K. parent company, Barclays PLC, London.

JPMorgan Chase & Co., New York, is among those U.S. powerhouses that are strengthening, climbing one spot to 11th place. In 2007, the firm's assets under management increased 18%, to $1.198 trillion. The asset inflows are significant because a sizable portion has been into higher-fee categories such as alternatives.

For example, at least 16% of overall assets under management was in real estate strategies at the end of 2007 compared with 9% at year-end 2002, according to data provided by the firm.

“As an asset manager, we have purposely developed our capabilities in alternatives,” said Eve Guernsey, chief executive officer of JPMorgan Asset Management in the U.S. “Private equity, real estate, single hedge funds and hedge funds of funds — these are all strategies that we believe clients demand. We're taking what has been historically a domestic platform and have gone global with it.”

JPMorgan AM's assets are split geographically with 60% in the U.S., 22% in Europe and the remainder in Asia and elsewhere, including emerging markets.

Goldman Sachs Asset Management, New York, entered the top 20 at No. 17 with $853 billion in assets under management, a 23% increase from the previous year. The firm had quadrupled its alternatives assets under management in the five years ended Dec. 31, 2007, with $128 billion invested in strategies including private equity and hedge funds. During the same period, non-U.S. assets under management more than doubled to $361 billion from $104 billion, according to data from GSAM.

“We intend to diversify our business further,” Suzanne Donohoe, managing director and head of GSAM International, said in an e-mail response to questions. “For example, deepening our commitment to the third-party funds business and the insurance asset management business.”

Assisted by favorable currency movements, many firms operating or domiciled in developing markets climbed to significant heights in 2007. Seoul-based Samsung Group climbed to No. 59 from No. 89 while China Asset Management Co. Ltd, Beijing, was ranked at 244 in the current survey, up from 401.

“In China, the market went through the roof” in 2007, Watson Wyatt's Mr. Baker said. “Meanwhile the (domestic) asset management industry is regulated to restrict the number of foreign investors. Therefore, the domestic players have benefited from this in particular.”

The Morgan Stanley Capital International China index returned 63.54% in 2007. During the same period, the yuan rose about 7% against the dollar.

Farley Thomas, global head of wholesale at HSBC Global Asset Management based in London, said expertise in developing markets also bolstered his firm. With $844 billion in assets under management, HSBC rose 42% to No. 18 from No. 25 a year earlier.

Rather than just focusing on “local products for local customers,” HSBC also promoted localized expertise across its global customer base, Mr. Thomas said. For example, a Brazilian equity fund launched in 2004 is now available in 30 countries and has about $1.35 billion in total assets, he said.

The integrated business model “became a powerful way of leveraging our local networks around the world,” Mr. Thomas said.

Independent alternative managers also made a clear impact, with The Blackstone Group, New York, reporting for the first time and entering the ranking at No. 134 with $102.4 billion in assets under management. London-based Man Investments, the world's largest listed hedge fund manager, climbed seven spots to 160th with $71.7 billion in assets under management as of year-end 2007.

Looking forward, however, the trend into active alternative management might slow. The current economic crisis presents a challenging environment for alternative managers for the remainder of 2008 and into 2009, Mr. Baker said. Passive managers will likely benefit, not just in the mainstream asset classes.

“In each of the past six or seven years, passive has continued to grow quicker than active,” Mr. Baker said.

According to an analysis by Watson Wyatt, passive assets grew at a compound annual rate of about 16% in the 10 years ended Dec. 31, 2007, to $6 trillion, compared with $1.3 trillion in 1997.

“A lot of clients have come to the conclusion that they might be better off with passive, at least in certain strategies ... For every active manager who outperforms, there are many more who underperform after fees and transaction costs”

Some strategies, such as certain quantitative and value equity strategies, continued to gather pace in 2007 even though performance had already showed signs of faltering, Mr. Baker said. The reason is because asset gathering tends to mirror track records of the previous two to three years, he added.

Most managers interviewed said they believe outperformance is already more difficult in 2008 and the trend is likely to continue in the coming years. However the crisis hasn't fundamentally changed their long-term business strategy.

“At this junction, which can only be described as unprecedented ... the ability to actually provide skill-based return is going to be harder,” BGI's Mr. Scanlan said, referring to the effects of the ongoing credit crisis on the broader asset management industry.

“Firms that stick to their knitting and hold true to their core objectives, and were well-managed in the past, will do well and become a more important part of the investment puzzle for clients.”

Contact Thao Hua at [email protected]