Oil slump blamed for falloff in assets

The decline in oil prices had a trickle-down effect on money managers that run assets for sovereign wealth funds in 2015.

Total assets managed for sovereign wealth funds by money managers in Pensions & Investments' universe were $1.04 trillion as of Dec. 31, down 13.7% from 12 months earlier.

In fact, every manager among the top 10 ranked by sovereign wealth fund assets under management recorded declines in those assets during 2015.

State Street Global Advisors had the most sovereign wealth fund assets under management in 2015, at $103.4 billion, but still saw assets fall 8.8% from 2014. BlackRock Inc. was second in 2015, with $79.7 billion, down 14.4% from a year earlier. At year-end 2014, SSgA was second and BlackRock ranked third.

BNY Mellon Investment Management, which ranked at the top of the list at year-end 2014, was third in the current ranking at $78.831 billion — a 37% plunge.

Traditional equity and fixed-income managers saw the most asset declines as sovereign wealth funds reclaimed assets, said Jeffrey Levi, partner, Casey, Quirk & Associates, Darien, Conn. With oil prices down 60% since the end of 2014, wealth funds in oil-producing countries such as the 7.08 trillion Norwegian kroner ($851 billion) Government Pension Fund Global, Oslo, had money pulled by government agencies to fund national programs that otherwise would have been funded directly by oil revenues.

Managers running less-liquid strategies were spared from dramatic withdrawals; among the top 25 managers of sovereign wealth fund assets, only three — AXA Investment Managers, Brookfield Asset Management and Starwood Capital Group LLC — reported gains in 2015.

“Oil was the big driver for sovereign plans whose economies suffered significantly, and many of those countries tapped into their sovereign funds for funding needs,” Mr. Levi said. “Those assets were pulled from more liquid funds like equities and fixed income, and indexed equity particularly was a big loser. There was a mindset among those funds of a fire sale in the early stages of the price decline.”

Matthew Oomen, managing director and head of international distribution at BNY Mellon Investment Management in London, said the firm suffered from drawdowns in passively managed assets, particularly from wealth funds in oil-producing countries. Mr. Oomen said the withdrawals were not related to the parent bank's $14.8 million settlement in August over Securities and Exchange Commission charges that BNY Mellon violated federal anti-bribery laws involving a wealth fund client.

“Passive isn't dead with sovereign wealth funds. It has its place” as an investment strategy, said Mr. Oomen. “It's an area that's the easier to pull money out of. In general, it's said that it's the simplest way to equitize cash, and many of them also will use passive sleeves to implement tactical asset allocation strategies.”

Messrs. Oomen and Levi both noted the drawdowns, while large in terms of assets, have less impact on revenue at money managers because those strategies are far less costly than more active strategies.

“On a fee basis, it's a different level. Sovereign wealth funds are paying really low rates,” said Mr. Levi. “The revenue impact (of money withdrawals) is disproportionate to a firm's economics. A loss of $1 billion from a hedge fund with 2-and-20 (fee structure) equals a much larger loss of assets at one basis point. It's a firm-to-firm question” as to the impact on the money manager.

While passive strategies have been hurt, BNY Mellon has seen gains in the fourth quarter of 2015 as well as the first quarter of this year in wealth fund use of active strategies to complement the passive strategies. “Sovereign wealth funds are the new defined benefit pension schemes,” Mr. Oomen said. “Sovereign wealth funds, especially those with long-term generational wealth, are long-term investors. The opportunities for driving new business is great.”

In a unique way, said Anais Faraj, London-based head of Middle East distribution at Legal & General Investment Management, the drawdowns haven't squelched wealth fund interest in passive equity and fixed income; they've increased their importance as an investment strategy. LGIM reported $29.11 billion in wealth fund AUM as of Dec. 31, 2015, a 4.5% decline from the previous year.

“Particularly with oil-exporting countries, every sovereign wealth fund we've talked to has been told to look at its cost base to save money,” Mr. Faraj said. “It is true that liquidity is easier in passive portfolios, but on a macro level, the big switch from active to passive is because of the focus on cost vs. return in the public markets, and to get more efficient, pure passive is more attractive to them.”

Casey Quirk's Mr. Levi said the decline in manager assets also has been affected by the trend among sovereign wealth funds to manage more assets internally.

“In many cases, more of them are thinking that they can do a better job of managing the money and at a lower cost,” Mr. Levi said. “A number of sovereign wealth funds have started to build their own internal investment teams or have money management firms tied to the fund to manage the money. Also, wealth funds are going into direct private equity, infrastructure, real estate. All of these are essentially insourcing.”

However, sovereign wealth funds are still outsourcing alternatives, including real asset investments, and that benefited firms like Brookfield Asset Management, which reported $12.1 billion in assets as of Dec. 31, up 76% from 12 months earlier. Brian Kingston, New York-based senior managing partner at Brookfield Asset Management and CEO of Brookfield Properties Group, said the company benefited from a trend among wealth funds to consolidate their manager lineup and go with firms like Brookfield that have larger scale.

Brookfield closed its Real Estate Opportunity Fund II fund at $9 billion earlier this year and Mr. Kingston said many of the investors in that fund were sovereign wealth funds from the Middle East, though he declined to identify them.

But for most money managers, said Mr. Levi, the asset decline in 2015 has led to a review of their wealth fund business.

“Many of them have had to look at what they're trying to do with sovereign funds,” Mr. Levi said. “I'm not sure sovereign wealth funds will be the same opportunity as they were three to five years ago. There could be some pockets of opportunity, because these are all large institutions that all behave differently. They'll need to align that with what they can offer. It's more of a business strategy question: Where should we allocate our sales and marketing people so we'll have the best opportunity.”