Money manager assets dip in '15; markets, oil slide blamed

Volatile markets, declining oil prices and asset owners re-evaluating where to invest their capital pulled down money manager assets in 2015.

Worldwide institutional assets of the 500 largest firms in Pensions & Investments' annual money manager survey dropped 2.8% in 2015 to $36.12 trillion.

A number of factors — such as slowing population growth and the decline of traditional defined benefit plans — are affecting flows, said Kevin P. Quirk, a founding partner and chairman of money management consultant Casey, Quirk & Associates LLC, Darien, Conn., in a phone interview.

“You have a generation of people where you just have slowing or negative population growth. That's a real headwind,” Mr. Quirk said. “The emerging markets aren't developing at a fast enough rate to counterbalance that.”

These factors, as well as challenging capital market conditions that are leading investors to rethink how they allocate their portfolios, are causing outflows from traditional institutional money managers.

Despite Casey Quirk's long-term view that the traditional institutional market is shrinking organically by 1% per year, Mr. Quirk explained there still are a tremendous number of opportunities for managers, “because there's a lot of movement” within the industry.

“When you look at where demand falls today, investors continue to search for high-quality managers that can provide solutions and outperformance in places where they're trying to get exposure,” Mr. Quirk said.

There were few changes among the top 10 managers ranked by total worldwide institutional assets under management. Only two firms — Legal & General Investment Management (Holdings) Ltd. and Pacific Investment Management Co. LLC — changed position.

BlackRock Inc. remained king of the money managers in P&I's survey, ranking first in worldwide institutional assets despite falling 2.2% to $2.98 trillion. The New York-based money manager also was No. 1 when ranked by U.S. institutional tax-exempt assets, which inched up 1.2% to $1.17 trillion. (The universe for this survey comprises managers of U.S. institutional tax-exempt assets.)

The major factors driving 2015 results “were largely around macroeconomic policy divergence,” such as China's decision to defend its currency and economy, declining oil prices, uncertainty in Europe and equity market valuations, said Mark McCombe, senior managing director and global head of BlackRock's institutional client business.

On a smaller scale, Mr. McCombe said BlackRock's clients have been pivoting toward more active management.

“We still continue to see strong flows into passive, so that doesn't slow down, but we're seeing more organic growth in actively managed and alternative strategies,” he said.

Mr. McCombe noted BlackRock also is seeing increased investor appetite in alternatives and multiasset-class solutions, which suggests investors are disappointed with the returns their passive investments are providing.

“Generating returns to meet liabilities is becoming harder to do year-over-year,” Mr. McCombe said. “We're working very closely with our clients to understand what their needs are.”

Vanguard Group Inc., Malvern, Pa., held steady at the No. 2 spot, with $1.97 trillion in global institutional AUM as of Dec. 31, up 8.1% from a year earlier. State Street Global Advisors, Boston, remained the third-largest money manager, with $1.81 trillion in global institutional assets, an 8.3% drop from the year before.

BNY Mellon Investment Management, New York, again ranked fourth, with a 4% drop in worldwide institutional AUM, to $1.4 trillion.

Jamie Lewin, managing director and head of manager research at BNY Mellon, offered another reason the industry experienced outflows. With the decline in energy prices, a number of sovereign wealth funds “were divesting across the investment management landscape to shore up domestic finances.”

“And given the size of the sovereign wealth investors, when that happens, they can move the needle,” Mr. Lewin added.

Mr. Lewin also noted a number of large asset owners “taking assets in-house.”

“It's been tough for the active manager,” he said.

Despite it being a tough year for active managers, Mr. Lewin said he expects the industry to be moving toward equilibrium as investors begin to see “that the roles of active and passive do complement each other.”

Active domestic equity investments among managers in P&I's universe dropped 6.6% as of Dec. 31 from a year earlier, to $2.32 trillion, while active domestic fixed-income strategies increased nearly 1%, to $3 trillion. Overall total indexed assets dropped 0.5%, to $3.36 trillion.

With the exception of enhanced domestic indexed bonds, which increased 17.1%, and enhanced international equity, which rose 9%, all other passive strategies either fell during 2015 or were flat.

One big change to the top 10 is the addition of Legal & General Investment Management. Due to a change in how it reports its assets, LGIM jumped 43.4% to fifth place from No.11 at the end of 2014. For the 2015 survey, the firm included assets in notional derivatives, which had not been included previously.

The other big change was for PIMCO, which fell to 10th place from fifth. Its worldwide institutional assets dropped 13% from the end of 2014, to $760.2 billion.

The departures in 2014 of co-founder William H. Gross, who was also chief investment officer, and Mohamed El-Erian, then-CEO and co-CIO, along with concerns that bond returns might weaken if interest rates rise and an industrywide shift to passively run funds caused investors to redeem money from PIMCO throughout 2015.

PIMCO spokeswoman Agnes Crane did not respond to a request for comment.

PIMCO also fell out of the top 10 managers ranked by U.S. institutional tax-exempt assets, falling to 12th place in the current survey with $303.7 billion, from 10th the previous year.

Similar to the trend of asset owners reconsidering where to put their money, Brad Morrow, New York-based head of manager research in the Americas for Willis Towers Watson PLC, has noticed that his firm's clients are seeking to better diversify their portfolios in order to achieve returns.

Another reason AUM is declining is that “institutions are diversifying and spreading capital around” to smaller, more specialty firms from larger, more traditional firms, Mr. Morrow said. “Our clients seem to be underweight to diversity and that's what they've been trying to implement over the last 18 months.”

He added that he believes “this reach for diversity” among investors will continue in 2016.

“We're going to see less searches in traditional asset classes,” Mr. Morrow said.

Other survey findings included:

• Among participating firms, worldwide institutional assets decreased 3% to $36.16 trillion.
• Total U.S. institutional tax-exempt assets of the top 500 dropped 1.2% to $14.13 trillion.
• Internally managed U.S. institutional tax-exempt assets of the top 500 decreased 1.8% to $12.71 trillion.
• 604 firms were profiled this year vs. 662 last year.
• Institutional tax-exempt assets internally managed by Canadian firms dropped 26% to $14.49 billion.
• Liability-driven investing strategies assets inched up 0.4%, to $2.19 trillion.
• Total U.S. defined benefit assets managed internally decreased 4.2%, to nearly $4 trillion.
• Total U.S. endowment and foundation assets managed internally dropped 1.3%, to $572.8 billion.