Managers finally back over the top

Total assets under management of the top 500 money managers broke through pre-crisis levels with a combined $76.5 trillion for calendar year 2013, according to the Pensions & Investments/Towers Watson World 500 ranking of money managers.

The assets rose 14% from the 2012 figures. This is the highest the assets have been since the end of 2007, when total assets under management peaked at $69.4 trillion.

“It is a very significant event that (total assets under management) is now past the pre-crisis level,” said Luba Nikulina, London-based global head of manager research at Towers Watson & Co. “I'm not entirely surprised considering how valuations were growing in 2013, and pretty much across all asset classes. It was to be expected that it would break the previous 2007 record.”

Performance in developed equity markets supported that observation. The Russell 3000 index gained 33.6% for the year ended Dec. 31, 2013, more than double the 16.4% return for the year previous. The MSCI All-Country World index returned 27.5% in the year, up from 2012's 16.1%. Bonds, however, took a bit of a battering, with the Barclays Capital Global Aggregate Bond index returning -2.6% vs. 4.3% in 2012.

Strong performance of U.S. stocks helped to ensure U.S. and Canadian managers continued to dominate the rankings, with a 55% share, or $41.9 trillion, at year-end 2013. That was an increase of 2.4 percentage points compared with figures in the 2012 report. U.S. managers accounted for 50.7% of the total, the largest proportion by country, and an increase of two percentage points compared with 2012.

“There are a number of reasons behind the U.S. standing head and shoulders above other regions and continuing on the growth trend,” said Ms. Nikulina. “The U.S. economy is in comparatively good shape, and the fundamentals there are relatively strong.”

Another factor, she said, is the trend of consolidation in the past few years, with larger managers buying up smaller players or management units of banks and insurers.

“Consolidation is happening in the asset management industry — especially driven by the changes in the banking regulation and insurance company regulation. We have seen a number of transactions where larger managers were buying units of banks and insurance companies,” said Ms. Nikulina.

“A number of significant players with long track records and large businesses of assets under management will be domiciled in the U.S. — and they are the ones that drive this consolidation and are able to have the scale and capital to acquire smaller players. That adds to the U.S. (total).”

European managers also gained ground, with their total share increasing to $26.3 trillion or 34.6%. The total increased by 9.6% compared with 2012. Japanese managers ended 2013 with $4.6 trillion, a decrease of 5.5% in the year. But there might be a simple explanation: the yen depreciated 17.52% against the dollar in 2013.

“Currency plays can make a significant difference (to converted figures) when there is volatility in the exchange markets,” said Ms. Nikulina.

The managers making up the top 20 were unchanged, although their share of total assets decreased by 0.4 percentage points to 41%, or $31.3 trillion. Here, U.S. managers dominated once again, with 66.6% of total assets managed by these firms. BlackRock Inc. remained in the top spot, increased AUM by 14% over the year to $4.3 trillion at end-2013.

Vanguard Group Inc. climbed to second position from third, pushing Allianz Global Investors into third place. Vanguard's assets under management increased 24.3% over the year to Dec. 31.

Other notable changes saw The Capital Group Companies Inc. climb two spots to ninth position, with a 16.7% increase in assets to $1.3 trillion. Northern Trust Corp.'s asset management division also jumped two spots, to 17th place, with a 16.5% increase in assets to $884.5 billion.

Ms. Nikulina said the top 20 is a “very stable place.” She also noted the top 20 is made up largely of independent managers, “which was not the case a few years ago. The proportion of independent managers has increased significantly over time.”

The top 20 was made up of nine independent managers, eight bank-owned managers and three insurer-owned firms.

One particular trend that stood out was the continued growth of passive management. “Managers see passive investment as one of the areas that is growing,” said Ms. Nikulina. She highlighted asset owners' sensitivity to costs and value.

The research found that the assets under management of passive managers had grown 16.2% over the year to Dec. 31, compared with 12.3% growth in 2012, and a 1.4% reduction in 2011. Passive assets under management at three of the top five managers all increased in the year. BlackRock's passive assets under management increased 12.7% to $2.3 trillion; State Street Global Advisors increased passive assets by 22.3% to $1.7 trillion; and Vanguard's passive assets under management were $1.6 trillion, up 25.9% over the year.

Scale, said Ms. Nikulina, is important in passive management, given the lower fees.

The growth of passive management is also related to ongoing trends in the asset owner community.

“The public and corporate pension funds are still very significant players in the asset management industry. But the growing segments are the growth of the retail market, and the capital coming from defined contribution funds — that is probably related to the trend of increased capital flows in passive management as well. With the long-term trend of defined benefit to DC, that is going to increase.”

Another growing category for capital is sovereign wealth funds. “They are becoming quite meaningful players in asset management,” she said.

As for 2014, Ms. Nikulina said Towers Watson's view is of “moderate growth. It is not going to be as spectacular as 2013. We have just been through a period of relatively significant volatility. However, the equity markets are still on the positive side. Our scenario is moderate growth, with risks skewed to the downside. There is a high probability of continued growth, just at a slower pace.”

The data seem to support that view. The MSCI All Country index has returned 4.7% year to date through Nov. 5.

The U.S. has continued to gain, with the Russell 3000 up 10.1% year to date through Nov. 5; while the BarCap Global Aggregate index has returned to positive performance, gaining 1.1% in the same period. n