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  2. DEFINED CONTRIBUTION
October 05, 2015 01:00 AM

Vanguard moves past Fidelity in ranking of manager of DC mutual fund assets

Target-date tide, surge in indexing, drives growth

Meaghan Offerman
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    Kevin Jestice

    Vanguard overtook Fidelity to become the largest manager of defined contribution mutual fund assets, according to Pensions & Investments' latest survey.

    As of June 30, Vanguard Group Inc., Malvern, Pa., managed $568.2 billion in proprietary mutual funds for defined contributions plans, up 7.9% from the previous year's survey.

    Knocked to No. 2, Boston-based Fidelity Investments reported $528.8 billion as of June 30, down 3.4% from the previous year. It is the first time in the survey's more than 20-year history that Fidelity did not occupy the No. 1 spot. Fidelity spokesmen declined to comment on reasons for the decline.

    Capital Group Co. Inc., Los Angeles, which offers the American Funds family, retained the No. 3 spot with $280.9 billion, up 2.8%. T. Rowe Price Group Inc., Baltimore, remained in fourth place with $216 billion, up 7.5%, while J.P. Morgan Asset Management, New York, rose two spots to rank fifth, with $73.2 billion, a 26.2% increase from the previous year.

    Managers of proprietary mutual funds most used by DC plans

    Ranked by total U.S. defined contribution assets, in millions, as of June 30, 2015.

    RankManagerAssets

    1Vanguard Group$568,207
    2Fidelity Investments$528,778
    3Capital Group$280,906
    4T. Rowe Price Group$216,023
    5J.P. Morgan Asset Mgmt.$73,210
    6Dodge & Cox$70,564
    7BlackRock$55,207
    8Wells Fargo$47,583
    9TIAA-CREF$45,647
    10Federated Investors$44,308
    11MFS Investment$44,089
    12OppenheimerFunds$41,888
    13Invesco$40,060
    14Dimensional Fund Advisors$34,477
    15Franklin Templeton$32,661
    16American Century$31,636
    17Prudential Financial$25,882
    18Columbia Threadneedle$24,538
    19Charles Schwab$21,246
    20Janus Capital Group$21,067
    21Goldman Sachs Asset Mgmt.$19,376
    22Harbor Capital Advisors$18,178
    23Voya Investment Mgmt.$17,487
    24Legg Mason$16,800
    25Great-West Financial$15,749

    In aggregate, the 25 largest managers of proprietary mutual funds used by DC plans ran $2.34 trillion in assets as of June 30, a 6.1% increase from last year.

    The overall number for the top 25 is affected by Pacific Investment Management Co. LLC, Newport Beach, Calif., which did not complete the 2015 survey. (PIMCO was dropped from the top 25 in doing the year-over-year comparison.)

    Kevin Jestice, principal and head of institutional investor services at Vanguard, said the firm has benefited from plan executives' growing adoption of target-date strategies and index fund tiers and increased participant allocations to those strategies.

    Vanguard remained the target-date strategy leader in 2015 with $221.5 billion in assets, up 22.4% from 2014. Vanguard's institutional Index-Institutional Plus also topped the list of largest domestic equity mutual funds with $59.5 billion, up 16.4% from last year. Fidelity's Contrafund fell to second place, with $58.3 billion, down 5% from 2014.

    Mr. Jestice said the rise in index and target-date assets is due in part to plan executives' search for low-cost investment options. Faced with regulatory, and other pressures, plan sponsors are becoming increasingly fee-conscious, he said.

    John Galateria, managing director and head of North America institutional at J.P. Morgan Asset Management, added that re-enrollment and the expansion of target-date funds as a qualified default investment option have led to increased target-date assets.

    The defined contribution marketplace “really is migrating in a steady and strong way to being a target-date dominant area,” he said. J.P. Morgan's total target-date assets rose 41.1% to $67 billion as of June 30, keeping it in fifth place.

    Leveraging relationships with the firms' defined benefit clients has positioned the firm's defined contribution business well, Mr. Galateria said.

    Other top target-date managers were Fidelity, which retained its No. 2 position despite reporting a 0.9% decline in its target-date assets to $165 billion. T. Rowe Price rose a notch to third place with $139.6 billion, up 21.9% from 2014, and BlackRock Inc., New York, fell to fourth from third despite reporting a 9.5% gain in its target-date assets to $131.4 billion.

    John Panagakis, TIAA-CREF senior managing director and head of asset management business development, also cited the rising popularity of target-date funds and index funds as part of TIAA-CREF's growth story. The New York-based firm advanced five positions in the mutual fund rankings to No. 9 with $45.6 billion in proprietary assets as of June 30, up 22.3% from 2014. During that period, TIAA-CREF's target-date assets rose 25% to $22 billion.

    Re-enrollment, 403(b) plan consolidation, and cost consciousness have been tailwinds for TIAA-CREF's target-date strategies, Mr. Panagakis said.

    In total, the 20 largest managers of proprietary target-date strategies used by DC plans managed $961.2 billion as of June 30, up 18.2% from 2014.

    P&I's survey also ranked the largest managers of custom target-date strategies. AllianceBernstein LP overtook BlackRock to become the largest custom target-date strategy manager with $33.6 billion, up 133% from last year. The jump was due to a restatement of assets and a large client gain.

    BlackRock ranked second with $27.3 billion, up 3.4% from 2014.

    J.P. Morgan ranked third among the largest custom target-date managers with $12.3 billion. Although a small part of the overall universe, there is “a steady flow of (custom target-date) opportunities that come out year to year,” said J.P. Morgan's Mr. Galateria.

    As defined contribution plans “continue to be an ever-growing share of the market” and plan design gets more comprehensive, it follows that plan executives are exploring custom target-date strategies, said Lorie Latham, a director at Towers Watson & Co. However, it takes “scale and buying power” to employ custom strategies, she said. Along those same lines, Ms. Latham said she has seen an uptake in DC outsourcing. Plan executives that want that customization but don't have a large internal staff may outsource.

    Chuck Black, senior vice president, investment services, at Fidelity Investments, said although plan executives are inquiring about custom target-date strategies, the pickup rate appears low.

    Domestic equity mutual funds most used by DC plans

    U.S. defined contribution assets, in millions, as of June 30, 2015.

    RankFundAssets

    1Vanguard Inst'l Index-Inst. Plus$59,473
    2Fidelity Contrafund$58,329
    3Fidelity Spartan 500 Index$47,529
    4Vanguard Institutional Index$47,066
    5American Funds Growth$42,106
    6Dodge & Cox Stock$32,570
    7Fidelity Growth Co.$27,946
    8Fidelity Low-priced Stock$19,632
    9Vanguard PRIMECAP-Admiral$18,199
    10American Funds Washington$15,231
    11American Funds Fundamental$13,603
    12Vanguard Ext. Mkt. Index-Inst. Plus$12,910
    13T. Rowe Price Growth$12,564
    14Vanguard 500 Index-Admiral$12,181
    15T. Rowe Price Blue-chip Growth$11,738
    16Vanguard Windsor II-Admiral$11,362
    17Vanguard Inst. Total SM-Inst. Pl.$10,987
    18MFS Value$10,705
    19T. Rowe Price Midcap Growth$10,494
    20T. Rowe Price Equity Income$9,523
    21Vanguard 500 Index-Inv.$9,043
    22Fidelity Spartan Ext.-mkt. Index$8,968
    23American Funds AMCAP$8,953
    24Fidelity Blue-chip Growth$8,912
    25American Funds Investment Co.$8,283

    Domestic fixed-income mutual funds most used by DC plans

    U.S. defined contribution assets, in millions, as of June 30, 2015.

    RankFundAssets

    1Vanguard Total Bond Mkt. Index-Inst. Pl. $14,851
    2Vanguard Total Bond Mkt.Index-Inst.$12,312
    3Dodge & Cox Income$9,991
    4Fidelity Spartan U.S. Bond Index$6,899
    5Prudential Total Return-Q$6,037
    6Vanguard Total Bond Mkt.Index-Adm.$4,281
    7American Funds Bond$3,626
    8J.P. Morgan Core Bond$3,567
    9Vanguard Total Bond Mkt.Index-Inv.$3,447
    10Loomis Sayles Core Plus$3,406
    11Federated Total-return Bond$3,276
    12Fidelity Total Bond$2,927
    13Loomis Sayles Bond$2,746
    14Fidelity Capital & Income$2,303
    15Western Asset Core Plus-I$2,295
    16Federated Inst'l High Yield$2,107
    17BlackRock High Yield$1,953
    18Janus Flexible Bond$1,867
    19Wells Fargo Adv. Core Bond$1,774
    20Pioneer Bond$1,706
    21Fidelity Strategic Income$1,458
    22American Funds High Income$1,443
    23Fidelity Intermediate Bond$1,417
    24Federated Ultra-short Bond$1,407
    25Fidelity Investment Grade Bond$1,332

    Vanguard's Mr. Jestice said the cost of customization can be “fairly high.”

    Alternative investments is another area that receives a lot of attention, but pickup rate seems low, Ms. Latham said. As of June 30, $12.4 billion of DC assets were in mutual funds that invest outside equity, fixed income, balanced strategies and money market funds — a small slice of the overall defined contribution market.

    When deciding on alternatives, “great care” is given to their incorporation, Ms. Latham said. Plan executives are saying, “Let's not put it in as a stand-alone option. Let's do this in a portfolio context.”

    There has been an appetite for commodities and real estate as part of a real asset or inflation-protection type of fund, said Drew Carrington, head of institutional defined contribution at Franklin Templeton Investments in San Mateo, Calif.

    He added that non-traditional stocks and bond strategies, like unconstrained fixed income or international small-cap equity, are finding their way into larger plans via white-labeling.

    Franklin Templeton's DC proprietary mutual fund assets rose 66.8% in the past two years to $32.7 billion as of June 30. Mr. Carrington attributed the increase in part to plan executives unbundling their plans' record keeping from investment management.

    “Plans have expanded opportunities for participants beyond funds offered by (their) record keepers, which has created opportunities for (the investment-only firm),” he said.

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