Money managers put financial crisis behind them

U.S. institutional tax-exempt assets under management by the largest 500 managers reached $13.22 trillion at year-end 2013. That 13.9% gain finally put the assets above the pre-financial crisis peak of $12.42 trillion at year-end 2007.

Total global assets of the largest 500 reached $52.3 trillion at year-end 2013, a 12% rise from the year earlier, according to data from the latest Pensions & Investments money manager survey. Global institutional assets under management among the top 500 money managers reached $35.18 trillion as of Dec. 31, up 9% from 2012.

Strong equity markets, low volatility and an increased appetite from institutional investors for target-date funds and infrastructure assets, as well as a desire to diversify portfolios, drove AUM growth among the largest U.S. money managers in 2013.

“Equities had a home-run year,” said Zainul Ali, director and head of manager research, Americas, at Towers Watson & Co., Toronto, in a phone interview. “And when you combine that with low or managed volatility, it's not surprising that AUM increased.”

Mr. Ali added that, aside from bonds, most asset classes “did really well” in 2013.

“It was a good year for beta. And you're seeing flows in fixed income,” said Benjamin F. Phillips, a partner at Casey, Quirk & Associates LLC, Darien, Conn. “A lot of this is a story about beta.”

Equity market returns were strong in 2013. The MSCI All-Country World index returned 27.4% for the year; the MSCI Europe Australasia Far East index returned 22.8% and the Russell 3000 rose 33% for the year. Fixed-income returns were not so helpful. The Barclays U.S. Aggregate Bond index returned -2% for the year and the Citi World Government Bond index return was -4.6%.

BlackRock Inc., New York, held the top spot, closing out the year with $2.88 trillion in worldwide institutional assets, up 11% from the year before. Rob Goldstein, currently senior managing director and global head of BlackRock Inc.'s institutional client business and BlackRock Solutions, in a phone interview, attributed the money management giant's growth to being “maniacally focused on client solutions.”

“The big themes we saw in 2013 were rethinking fixed-income allocations, amplifying alternatives allocations, target-date funds and a continual quest among clients for more efficient beta exposures,” added Mr. Goldstein, who will take on the role of chief operating officer at BlackRock starting June 1.

State Street Global Advisors, Boston, held on to the No. 2 spot, with a 10% increase in worldwide institutional assets to $1.84 trillion.

The institutional area continues to be the dominant part of our business,” said Scott Powers, president and CEO of SSgA. He added that the firm in particular has seen its defined contribution assets grow and become “a real source of strength.”

In addition, SSgA in 2013 launched the SPDR Blackstone/GSO Senior Loan exchange-traded fund, an ETF for speculative-grade loans in partnership with New York-based The Blackstone Group LP's GSO credit division, which also contributed to SSgA's AUM growth.

Malvern, Pa.-based The Vanguard Group Inc. moved up one spot to rank third on the list, with $1.68 trillion in global institutional assets, up 26.4%.

“Equity markets were very strong in 2013, and we benefited from strong equity returns. But we also benefited from the widespread adoption of various index strategies from various institutional investors,” said Chris D. McIsaac, managing director and head of the institutional investor group at Vanguard. He also noted that Vanguard has seen success in its target-date strategies.

Bank of New York Mellon Investment Management also moved up one spot, with $1.342 trillion at year-end, up 7%. Pacific Investment Management Co. LLC, Newport Beach, Calif., saw its assets — and rank — drop. The fixed-income titan moved down two spots to fifth place among managers ranked by worldwide institutional assets, reporting $1.339 trillion, down 6.2% from year-end 2012.

Alternatives continued to play a key role in AUM growth in 2013.

Michael O'Brien, a managing director at J.P. Morgan Asset Management and head of global institutional, New York, said his firm has “seen some significant inflows in infrastructure and real estate,” driven by sovereign wealth funds diversifying their portfolios.

J.P. Morgan Asset Management ranked eighth by global institutional AUM, with $859.78 billion as of Dec. 31, up 8.6%. It was No. 1 among managers of internally managed U.S. institutional tax-exempt assets in infrastructure, with $2.57 billion, and it was seventh among managers ranked by worldwide assets managed for sovereign wealth funds, with $41.96 billion.

Sovereign wealth funds contributed a substantial portion to managers' global AUM growth, providing $1.32 trillion in assets to the total figure at the end of 2013, up 19.5% from the previous year. Central banks, meanwhile, contributed $670.5 billion to the total global AUM, up nearly 19% from the year before.

Mr. Powers said that in 2013 he saw sovereign wealth funds and central banks “continue to contribute to their accounts in meaningful ways.” Energy-rich countries, he noted as an example, are converting their energy assets into financial assets.

The industry also saw considerable DC growth, which also contributed to larger AUM. Defined contribution assets under management by the firms in P&I's database grew to $5.19 trillion as of Dec. 31, up 21% from a year prior. Because of the growing importance of DC assets, a number of the largest money managers said there was an increased demand among institutional clients for target-date funds.

“We've seen tremendous success in our target retirement fund strategies,” said Vanguard's Mr. McIsaac. “Target-date funds have taken off in the industry over the last seven to eight years.”

Meanwhile, Mr. Powers noted that at SSgA “target-date funds have been a real area of growth” for his company. “It's been where the bulk of new money has gone, both in the industry and in SSgA.”

Mr. Goldstein also has seen an increased interest among BlackRock's institutional clients in target-date funds in 2013 that's continuing this year.

The rising interest in target-date funds is due to the defined benefit market steadily shrinking within the money management industry and the defined contribution market growing.

“The defined benefit space has been quite stable,” Mr. Powers said. “But ... as Americans age, we're seeing clients in that space reallocate away from the equity market to more diversified assets that match their long-term liabilities.”

Mr. McIsaac explained that, although the defined benefit market “remains a large pool of assets,” defined benefit plans “are playing a smaller role in the U.S. retirement system and DC plans are shouldering more of the responsibility.”

Interest in unconstrained fixed income was another dominant theme that some money managers found in 2013. According to Mr. Goldstein, in 2013 BlackRock found unconstrained fixed income both as a risk diversification and also as a return generator.

“The No. 1 client conversation we had in 2013 was about rethinking fixed income and how it relates to the benchmark,” Mr. Goldstein said.

Mr. O'Brien said that J.P. Morgan, too, is “seeing more unconstrained fixed-income mandates these days.”

Among other findings of the survey:

• Overall, worldwide assets managed by the 658 managers that participated in the year-end 2013 survey rose 12% to $52.42 trillion; in the year-earlier survey, 678 firms responded.
• Assets invested in UCITs and mutual funds rose nearly 15% to $20.82 trillion. Of that total, $15.25 billion was invested in U.S. 1940 Investment Company Act funds, up about 17% from a year earlier.
• Liability-driven investment strategies for worldwide clients rose 6.6%, to $1.5 trillion, as of Dec. 31.
• Hedge fund investments for worldwide clients were flat, at $726.5 billion. Direct hedge fund investments dipped 1.2% to $454.6 billion, and assets in funds of funds grew 3% to $271.9 billion.
• Firms reported $789.9 billion in worldwide investment outsourcing/fiduciary management mandates, up 36.7% from a year earlier.

Looking forward, Mr. Goldstein said the themes he saw and conversations he had with institutional clients in 2013 are continuing in 2014.

“We shouldn't underestimate how much liquidity clients continue to have, and (they) are going to continue to put that money to work,” Mr. Goldstein said.

Although many managers and consultants interviewed for this story expect to see continued AUM growth in 2014, Mr. Ali believes the real question that institutional investors should be asking is how this growth is benefiting them.

“I congratulate these managers, but we need to keep putting pressure on money managers to come up with better fee-aligned structures,” Mr. Ali said, noting asset owners need to make sure that they're not being charged “alpha-style fees for beta strategies.”

Casey Quirk's Mr. Phillips said that, even though it's slow, organic AUM growth is what institutional investors should focus on because of its predictability. “We continue to believe going forward, true organic growth in the industry is only going to be 1% to 2% per year,” he said, adding: “Investors should be focusing on organic growth. Those that don't are playing with fire.”