Money manager assets dip after 2-year rebound

U.S. institutional tax-exempt assets of the 500 largest money managers declined 5.3% in 2011, the first slip after two years of rebounds from the global financial crisis, Pensions & Investments' latest annual money manager survey shows.

Assets under management for the group totaled $10.83 trillion as of Dec. 31, down from $11.42 trillion at year-end 2010.

Their AUM had grown 11.2% in 2010, off a half-percentage point from the previous year.

U.S. institutional tax-exempt assets of the top 500 managers still have yet to regain the pre-crisis asset high at the end of 2007.

Exacerbating overall asset declines in 2011 was that international equity markets did poorly, at the same time money was flowing into the asset class, said Kevin Quirk, a partner with money manager consultant Casey, Quirk & Associates LLC, Darien, Conn.

The Morgan Stanley Capital International All Country World returned -7.35% for the year, and the MSCI EAFE returned -11.3%. That compares with the domestic Russell 3000 benchmark, up just 1.03% in 2011.

On the fixed-income side, the Barclays Capital Aggregate bond index was up 7.84% and the Barclays Capital Global Aggregate Total Return index was up 5.64%.

But an even more powerful reason for the drop, Mr. Quirk asserted, is a maturing of the institutional money management industry because of a confluence of events.

An increase in frozen pension plans among U.S. corporations has meant shrinking investment capital among that group, while the poor economy has left foundations and endowments with lower contributions, he said.

“You don't have that big net flow tailwind happening anymore,” Mr. Quirk said.

The largest managers of U.S. institutional tax-exempt assets in P&I's survey — BlackRock Inc. and State Street Global Advisors — both were down from their year-earlier totals. (P&I will take a look at the managers' worldwide assets in the June 11 issue.)

BlackRock's $831.74 billion declined 10.5% during 2011, SSgA's total $694.51 billion fell more than 18%.

The biggest decline among the leaders, however, was suffered by Legg Mason Inc., whose assets fell 41.4% to $203.48 billion during 2011. The drop knocked Legg Mason out of the top 10 and into 11th place.

Mary Athridge, a spokesman for Baltimore-based Legg Mason, said in a statement that $102 billion of the asset drop was due to legacy money market assets being classified as taxable. Excluding the reclassified assets, Legg Mason's assets dropped 12.1%.

The most substantial asset gain among the top 10 came from Prudential Financial Inc., which reported U.S. institutional tax-exempt assets of $330.72 billion in 2011, up 14% from 2010.

Other sizable increases among the top 10 were at PIMCO and J.P. Morgan Asset Management, each with 7.7% gains.

Pacific Investment Management Co. LLC had U.S. institutional tax-exempt assets of $396.05 billion at year-end, placing it seventh, while J.P. Morgan Asset Management saw its assets rise to $212.3 billion, moving up to 10th from 12th a year earlier.

Many money management company officials — including Legg Mason's Ms. Athridge and Edwin Conway, New York-based head of BlackRock's U.S. & Canada institutional group — said outflows came from active domestic equity.

Indeed, active domestic equity assets reported by the 687 managers responding to this year's survey were down nearly 10%, to $1.61 trillion. The average asset mix of the top 500 managers shows stocks (domestic and international, active and passive) dropping to 44.7% from 46.1%.

Mr. Conway said institutional clients last year sat on high levels of cash because of concerns about the effect of the European crisis on market volatility.

He also said there was a shift among institutional investors from active-income strategies to passive ones as investors sought “efficient beta” with the yield on 10-year Treasury notes down to 1% to 2%, Mr. Conway said, “paying active management fees erodes the ability to really get value.”

He said institutional investors are asking themselves “when it comes to paying those fees in today's (low-rate) environment, is it worth that?”

Mr. Conway said investors are re-examining their fixed-income portfolios and, in many cases, moving to multiasset portfolios that combine passive fixed income, bank loans, emerging markets debt and high yield. He said investors also are looking at various strategies involving the use of alternatives.

Fixed-income index strategies represented 35%, or $479.1 billion, of BlackRock's institutional index AUM at the end of last year, according to its 10-K.

Among managers reporting their asset breakouts to P&I, however, indexed bond strategies lost nearly 20%, at $440.83 billion. Overall, indexed strategies dropped nearly 10%.

SSgA remained in second place in P&I's survey, even with its more than 18% drop in assets under management. Scott Powers, SSgA's president and CEO, said the company would have shown a $19 billion gain if not for two events.

First, SSgA had been managing a portfolio of mortgage-backed securities for the Treasury Department, a program that started winding down in 2011. Mr. Powers said $125 billion of the Treasury's funds were removed from SSgA's total last year. Second, SSgA reduced the collateral backing a securities lending pool by $50 billion in 2011 as it reduced risk in the program, he said.

Mr. Powers said the eurozone crisis put the brakes on institutional investing in the second half of 2011.

“The disruption in the third and fourth quarter of last year was triggered by the European sovereign debt crisis,” he said. “It created a risk-averse or risk-off trade, and client money flowed into safe harbors,” he said.

Mr. Powers said that hurt flows overall.

“People, in taking risk off the table, either stopped putting money to work in more traditional mandates like stocks and bonds, or took money out of the riskier securities and put them into cash or government guaranteed funds,” he said.

But Prudential Investment Management CEO and President David Hunt said the riskier investment environment actually has helped his firm.

“As pension plans have moved to take risk off their balance sheet, we have actually — on a relative basis — benefited from that,” he said.

Mr. Hunt said Prudential has long-term experience in long-duration fixed income and liability-driven investing strategies increasingly being sought after by executives at corporate pension plans.

He said Prudential's multimanager model enables the investment teams in six separate investment subsidiaries to develop “a razor sharp focus” on specific asset classes and focus on investment performance, something he argues is more difficult to do at large, integrated managers.

Officials at PIMCO, Newport Beach, Calif., said that firm's growth came in asset-allocation and absolute-return strategies as well as traditional fixed income.

“Nearly 85% of the new assets were in non-core strategies as investors worked with us on broader investment solutions,” said Thomas Otterbein, a PIMCO managing director and head of its client facing group in the Americas. “In the traditional fixed-income sectors, we saw a continued interest in credit strategies and cash mandates as clients pursued higher-yielding alternatives to enhance portfolio returns.”

At BNY Mellon Asset Management, diversification among the manager's 16 different boutiques helped assets grow in a difficult environment, said Curtis Arledge, New York-based vice chairman of BNY Mellon and CEO of investment management.

“Part of the story is equity vs. fixed income,” Mr. Arledge said. “Fixed income-heavy managers on our platform have benefited from the movement of capital in that direction.”

Mr. Arledge said there were strong institutional inflows in international equities in 2011, particularly in emerging markets, even as stocks prices were down in 2011.

BNY Mellon reported $381.36 billion in U.S. institutional tax-exempt assets last year, ranking eighth overall. Assets were down 3.4% from 2010.

Market volatility, a key theme in 2011, will be continuing indefinitely because the eurozone crisis shows no signs of resolving anytime soon, said Stephen Potter, president of Northern Trust Global Investments, Chicago.

“I don't expect in another six to 12 months after the U.S. election, (to be) saying "OK the coast is clear,'” he said.

While that volatility limited top-line growth at Northern Trust Global Investments, Mr. Potter said a 38% jump in the money manager's defined contribution business, to $65 billion at year-end 2011, helped the firm.

“Our new business wins, particularly in DC, more than offset the declines we experienced due to market volatility and minimal lost business,” he said.

Northern Trust's U.S. institutional tax-exempt assets were relatively flat in 2011, growing just 0.7% to $460 billion.

Mr. Quirk of Casey Quirk said he expects AUM being slightly down overall might become the industry norm in coming years as the industry continues to mature.

He said the days when all managers are winners is over. The markets carried most managers for three decades, except for a brief period during the Internet bubble, he said. The financial crisis in 2007 started changing the game, he stated, as positive returns no longer were practically guaranteed.

“Maybe for the first time ever, this is becoming a real takeaway game,” he said. “This is suddenly becoming a very competitive industry where there are winners and losers.”

Among other major shifts in survey categories:

c Overlay managers reported significant increases in 2011, with $397.3 billion in U.S. institutional tax-exempt assets as of Dec. 31, up 57.5% from $252.3 billion the previous year.

The top overlay manager by far, AllianceBernstein LP, reported an increase of 89.2%, to $96.72 billion. The firm reported $68.7 billion allocated to currency, up from $48.5 billion the previous year and a first-time allocation of $26.6 billion to GTAA.

Phone calls to Neil Maroney, senior financial analyst at AllianceBernstein, were not returned.

c Internally managed defined contribution assets rose 4.7% in 2011 to $3.34 trillion, while internally managed defined benefit assets fell 2% to $3.52 trillion.

c Assets designated as “international equity” fell 15.3% in 2011, but it wasn't all due to the markets. Assets categorized as “global equity” increased 15.4% as investors reclassified their portfolios to the broader “global” strategies.

c Investments in high-yield securities fell 11.6% to $170 billion, while the Bank of America Merrill Lynch U.S. High Yield index rose 4.4% for the year.

c Treasury inflation-protected securities grew 22% to $106 billion, and convertibles rose 7.3% to $17 billion.

c Currency strategies rose 74% to $40 billion, as investors expand their overseas equities portfolio and seek diversified sources of alpha.

c In addition to the drop in overall equity holdings, other significant changes in the average asset mix of the top 500 managers were: overall bonds rising to 37.5% from 35.1%; real estate equity rising to 3.7% from 3.3%, and private equity edging up to 1.4% from 1.2%. Reported hedge fund allocations remained at 0.7%, and cash dropped to 8% from 9.3%. n

Reporter Rob Kozlowski contributed to this story.