DC assets on the upswing

Defined contribution managers bounced back a bit from the morose markets of 2008, as assets under management rose 19.7% in 2009. However, the year-end 2009 AUM total was still 12% below that of what investors and managers consider the good-old days of 2007.

The 278 managers reporting DC assets under management for year-end 2009 in Pensions & Investments' annual survey reported $3.26 trillion in total defined contribution assets. That figure compares with $2.72 trillion at year-end 2008 and $3.7 trillion in 2007. Internally managed DC assets in 2009 were $2.91 trillion, up 19.5% from $2.44 trillion at year-end 2008, but still below the $3.25 trillion from year-end 2007.

Asset mixes shifted noticeably during the two-year period since P&I last published defined contribution data. (While P&I gathered data for year-end 2008, it did not publish the data.) By Dec. 31, 2009, the aggregate equity component had dropped to 53% from the 63.7% two years earlier. Fixed-income, meanwhile, grew to 22.9% and stable value investments grew to 14.2%, from 16.4% and 11.6%, respectively.

Cash played a bigger role in 2009, representing 5.6% compared with 3.8% in 2007. Other investments, including alternatives, accounted for 4.3% of overall assets compared with 4.5% in 2007. The year-end 2009 survey was the first in which P&I broke out alternatives for DC managers; that broad category accounted for 1.4 percentage points of the total 4.3% in “other.”

The big shift in asset mix between 2007 and 2009 is due more to market factors than to panicky investors or sponsors.

“I think the ramp up (of greater percentages) in fixed income and stable value and cash was more a reflection of the shrinking of equities,” said Tom Kmak, Kansas City, Mo.-based CEO of Fiduciary Benchmarks Inc. “I don't think they're withdrawing funds or making dramatic changes.”

Toni Brown, director of client consulting for Mercer LLC in San Francisco, agreed that the damage to equities from the markets during the period played the biggest role in altering the asset mixes.

Taking P&I's data and applying some common indexes — such as the Standard & Poor's 500 for the equity component and the Barclays Capital Aggregate for fixed income — Ms. Brown came up with a rough estimate of how market forces affected the change in asset mix between 2007 and 2009.

She said market forces could explain most of the change in the equity asset mix, adding that about 4.6 percentage points of the total change might be due to participants moving out of equities. “People move too late,” she said. As for fixed income, she estimated about 3 percentage points of the gain between 2007 and 2009 was due to participants' moving their money.

Her calculations indicated that the change in stable value during this period could be attributed to market activity.

“I think it's a positive that we saw such little movement (by participants),” she said. “I hope people understand that this is retirement and that they're in it for the long haul.”

The largest DC managers are continuing to pull themselves back toward the level of the 2007 glory days.

Top-ranked Fidelity Investments, Boston, managed $452.4 billion by year-end 2009, up 23% from year-end 2008 but still down 17.5% from year-end 2007. Likewise, TIAA-CREF Inc., New York, held onto second place with assets of $372.3 billion, up 13.7% from a year earlier but still down 6.1% from 2007.

Vanguard Group Inc., Malvern, Pa., was in third place, with its $320.1 billion in DC assets under management, up 27% from a year earlier and basically flat from its year-end 2007 total.

“The real story is the growth in target-date funds,” Gerard Mullane, director of institutional sales for Vanguard, said in an interview. “More than three-fourths of the plans we work with offer target-date funds.”

Mr. Mullane doubted that Vanguard's DC business was affected much by participants making big changes in investment behavior. Company research shows that 10% to 15% of participants make changes in any given year, said Mr. Mullane, adding that participants' altering their portfolios “was probably at the low side of the percentages” during the volatile markets of 2008 and 2009. “Inertia looms large,” he said.

BlackRock Inc., New York, jumped to fourth place in 2009, with $275.8 billion, but it was helped by its acquisition of Barclays Global Investors, San Francisco. At year-end 2008, BGI placed fifth with $150.6 billion and BlackRock was 11th with $62.6 billion.

Capital Research & Management Inc., Los Angeles, rounded out the top five with $215.9 billion. Capital Research has been dropping in rank since 2007 when it ranked third; at year-end 2008, it ranked fourth.

“We saw our assets decline (from 2007) in large part because of the broad shift from equities into fixed income, and some clients have sought other managers for their fixed-income investments,” Chuck Freadhoff, director of media relations for The Capital Group Cos., the parent of Capital Research & Management, said in an e-mail response to questions.

Capital has seen “an increased interest in non-U.S., global and emerging markets,” he added. “So far this interest primarily has taken the form of questions and RFPs. So, it is our belief that some of this interest will result in decisions to allocate more assets to those categories in the coming year.”

Mr. Freadhoff stated that growth in Capital's DC business would depend on a stronger, sustained economic recovery. “When the unemployment rate falls and more people are working, you'll see the number of plan participants increase,” he wrote.

State Street Global Advisors, Boston, remained in sixth place, with $155.6 billion, while Pacific Investment Management Co. LLC, Newport Beach, Calif., continued to climb. PIMCO ranked seventh at year-end 2009 with $131.4 billion; in comparison, it ranked eighth at year-end 2008 with $98.5 billion and 11th in 2007 with $73.2 billion. PIMCO benefited from its fixed-income management, said Stacy Schaus, senior vice president for defined contribution practice at PIMCO. Of PIMCO's defined contribution assets under management, 62% was in fixed income and 18% in stable value.

Ms. Schaus said PIMCO's asset growth may have benefited from DC participants moving from equity-heavy investments to PIMCO's products, but she didn't have specific numbers.

Between 2007 and 2009, PIMCO has seen steady growth in mutual funds, separate accounts and collective investment trusts. The biggest component is mutual funds, where assets more than doubled to $88 billion from $43 billion, she said.

Among all the DC managers reporting, however, mutual fund assets lost the most ground during the 2007-2009 period, falling 18.3% to $1.34 trillion. Assets assigned to pooled and commingled vehicles dropped 9% to $945.5 billion. Separate accounts recorded a small gain during the same period, rising 2.8% to $576.6 billion.

“Long-term, I think you'll see more (assets) in comingled accounts and separate accounts,” said Mr. Kmak of Fiduciary Benchmarks. “This is fee driven.”

Mercer's Ms. Brown also said she expects an increase in assets for separate accounts and collective investment trusts.

Both also predicted target-date funds would continue to grow. In the P&I survey, the broad category called balanced/asset allocation, which includes target-date funds, totaled $303.6 billion at year-end 2009 — a 33% gain from year-end 2008 and up 12% from 2007.

In previous surveys, P&I didn't break out target-date funds from other types of funds in this broad group. But for year-end 2009, DC managers reported $201 billion in target-date funds and $3 billion in custom target-date funds. n