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Money Management

Veteran managers boost assets 75% over decade

Growth illustrates how size keeps fees in line and attracts business

Frances M. Kinniry said Vanguard’s growth was never part of a deliberate plan; the focus was always on investors.

Worldwide assets under management by veteran investment firms rose 75.1% to $39.758 trillion in the 10 years ended Dec. 31, based on data collected for Pensions & Investments' annual money manager survey.

Over the decade, which encompassed a deep market downturn after the 2008 financial crisis followed by a record U.S. equity bull market, large money managers experienced average growth of worldwide AUM of 71.6% and median growth of 43.6%, an analysis of P&I data showed.

Aggregate worldwide assets of the 10 largest money management firms within this veteran universe totaled $26.1 trillion as of Dec. 31, up 110% from Dec. 31, 2007, and the assets managed by those firms accounted for 65.6% of total universe assets. (The group was composed of 29 managers that responded to P&I's survey with at least $250 billion in worldwide assets as of Dec. 31, 2007, and were still in operation as of Dec. 31, 2017. Included in each manager's total were net assets gained through acquisitions of at least 51% ownership in other money managers as well as net investment gains and net asset flows.)

Observers predicted the next decade would be more challenging for money managers, particularly regarding the degree to which performance impacts net inflows.

"In the past, there was always a question of which was more important for asset growth — performance or distribution," said Sean A. McKee, national practice leader-public investment management, KPMG LLP, New York. He added that going forward, "without stellar performance, you likely will not hold onto assets just because you have good distribution."

In the 10 years ended Dec. 31., BlackRock (BLK) Inc. (BLK) topped P&I's veteran universe ranking with $6.288 trillion in worldwide AUM, up 364%. Following was Vanguard Group Inc., with asset growth of 262% to $4.94 trillion over the same period.

Both firms also experienced high growth in U.S. institutional tax-exempt assets during that time frame: BlackRock's assets increased 572% to $1.545 trillion, while Vanguard's AUM rose 264% to $1.373 trillion.

Not surprised

Sources were not surprised by the dominance of the two firms. " BlackRock (BLK) and Vanguard lead the charge in the money management industry. Both have large passive businesses which helps grow their asset bases. Big and trusted remains big and trusted," said Mr. McKee.

The other firms occupying the top five spots in P&I's ranking based on worldwide AUM were State Street Global Advisors with $2.782 trillion, up 40.6%; Fidelity Investments, $2.449 trillion, up 31.5%; and BNY Mellon Investment Management, $1.893 trillion, up 68.8%.

Growth of worldwide assets over the decade was overwhelmingly organic — net inflows and investment performance — on a manager-by-manager basis, with median growth of 96.7% and average growth of 68.7%.

Some notable exceptions include New York-based BlackRock, which got 45.5% of its growth from 10 acquisitions over the 10 years; Franklin Templeton (BEN) Investments (BEN), which achieved 58.7% of its $760 billion in assets through two deals; and Goldman Sachs Asset Management, which attributed 41.3% of its net growth to $1.494 trillion to nine acquisitions and two divestitures.

Largest deal

BlackRock (BLK) struck the largest deal of the decade with the 2009 purchase of most of Barclays Global Investors NA, which added $2.078 trillion to the firm's AUM.

BlackRock's acquisition of BGI was transformational, sources said, because the deal not only added assets under management but also brought in new investment capabilities that fueled the firm's growth, including passive and quantitative investment expertise, exchange-traded funds and customized target-date funds.

BlackRock has been "the best acquirer," said investment banker Elizabeth Bloomer Nesvold, founder and managing partner of Silver Lane Advisors LLC, New York. " BlackRock only does a few deals but they do them very well. The deals generally are impactful and the AUM is meaningful at the time of the deal or later through growth from cross-pollination across the firm," Ms. Nesvold said.

When asked for comment about BlackRock's growth over the 10 years ended Dec. 31, company spokesman Edward Sweeney said in an email: "Our long-term strategy has been to create a diverse and integrated global investment and technology platform, one that serves clients in all market environments."

By contrast, Vanguard's growth of 262% was entirely organic.

Other managers in P&I's veteran universe that relied entirely on net returns and net inflows for growth included BNY Investment Management, with asset growth of 68.8% to $1.893 trillion; Wellington Management Group LLP, with $1.08 trillion, up 83.6% in the decade; and T. Rowe Price Group Inc., which grew 147.8% to $991 billion.

Prudential Financial saw growth of 115.2% to $1.394 trillion, 99.6% of which came from net performance and inflows.

The spectacular growth of Malvern, Pa.-based Vanguard's worldwide assets over the past decade was not the result of a deliberate plan, said Frances M. Kinniry, principal and head of portfolio construction in the Vanguard investment strategy group. "The growth of assets under management and cash flow have never been anything we focus on as a strategic priority," he said. "We focus on our mission — to give investors the best chance of retaining their assets at their chosen risk level."

By way of fulfilling that mission, Vanguard consistently keeps investment costs as low as possible, Mr. Kinniry said, adding that "since inception, Vanguard has been a leader on establishing the intersection of investment talent and costs."

The issue of investment cost — part of the perennial debate over passive vs. active management — has deeply affected active managers over the decade, sources said.

"Investment flows are pointing to the obvious conclusion that if you're not a manager in the cheapest quintile, you must have very good performance to survive," said Michael Falk, partner, Focus Consulting Group LLC, Long Grove, Ill., an adviser to money managers.

KPMG's Mr. McKee agreed, stressing "active managers need to beat their benchmarks to stay in business. Investors are getting tougher about active managers which consistently lag their benchmarks vs. those who are beating the average of the market."

Active management specialist Legg Mason (LM) Inc. (LM), Baltimore, saw a 22.8% drop in assets to $767 billion in the 10-year period with declines in all investment categories it ran in 2007 — equity, fixed income and money market funds — said company spokeswoman Mary Athridge.

"We understand that both investor needs and return expectations have changed and we've been trying to pivot to new investment strategies and new vehicles," she said, pointing to changes in fixed-income strategies, which have grown 17.2% in the five years ended Dec. 31 to $420 billion; 10 years ago, fixed-income totaled $14 billion. Legg Mason also rolled out non-traditional, opportunistic and absolute-return strategies over the last decade.

Scale is key

Going forward, scale will be essential, KPMG's Mr. McKee said. Managers seeing 30% to 40% growth over the last 10 years "probably will survive" but will experience problems if they start losing assets.

For money managers to thrive over the next 10 years, "transformational" deals akin to BlackRock (BLK)'s BGI acquisition will be important for firms that "want to climb the list," Silver Lane's Ms. Nesvold said.

"Invariably, financial markets will experience enough pressure to break," signaling the end of the current bull market, Ms. Nesvold said. The ensuing environment of poor performance might be protracted, creating opportunities for "bigger entities which currently are biding their time to pick up capabilities they need to complete their investment lineups" from those money managers that struggle.

10-year growth of the largest money managers
Ranked by worldwide assets under management as of Dec. 31, 2017. All dollar amounts are in millions.
RankManager Total worldwide assetsChange from 12/31/2007Net growth from acquisition/
divestment, 2007-2017
Net growth from investments/
flows, 2007-2017
1 BlackRock (BLK) $6,288,195 363.5%45.5%54.5%
2 Vanguard Group $4,940,350 262.0%0.0%100.0%
3 State Street Global Advisors$2,781,693 40.6%-79.1%179.1%
4 Fidelity Investments$2,448,807 31.5%1.1%98.9%
5BNY Mellon Investment Mgmt.$1,892,941 68.8%0.0%100.0%
6Capital Group$1,778,134 39.0%-80.9%180.9%
7J.P. Morgan Asset Mgmt.$1,714,230 43.6%39.5%60.5%
8Goldman Sachs Asset Mgmt.$1,494,000 75.1%41.3%58.7%
9 Prudential Financial$1,393,928 115.2%0.4%99.6%
10PIMCO$1,335,250 78.9%2.9%97.1%
11Wellington Mgmt. Group$1,080,307 83.6%0.0%100.0%
12T. Rowe Price Group$991,100 147.8%0.0%100.0%
13Nuveen/TIAA$970,459 122.9%23.2%76.8%
14Northern Trust Asset Mgmt.$961,388 27.0%1.6%98.4%
15 Invesco (IVZ)$937,598 87.5%13.8%86.2%
16 Morgan Stanley (MS) Inv. Mgmt.$935,501 42.9%-40.6%140.6%
17DWS Group$842,758 3.3%5.3%-105.3%
18UBS Global Asset Mgmt.$796,310 1.3%6.9%93.1%
19 Legg Mason (LM) $767,241 -22.8%27.5%72.5%
20 Franklin Templeton (BEN) Inv.$759,766 18.0%58.7%41.3%
21Manulife/John Hancock$756,477 197.5%16.8%83.2%
22 MetLife Inc.$624,995 11.9%15.1%84.9%
23 Schroders$589,470 112.8%2.2%97.8%
24 AllianceBernstein (AB) $554,491 -30.7%-44.5%-55.5%
25Wells Fargo Asset Mgmt.$491,759 79.0%0.0%100.0%
26Nomura Asset Mgmt. Co. $473,480 84.3%0.4%99.6%
27 Federated Investors (FII) $397,570 33.9%48.1%-148.1%
28Credit Suisse Asset Mgmt. $394,658 -35.7%0.0%-100.0%
29 MassMutual Financial Group$365,512 -7.2%3.3%96.7%
Total$39,758,368 75.1%
Universe includes firms that managed at least $250 billion in worldwide assets as of Dec. 31, 2007, and that were still in existence as of Dec. 31, 2017.
Source: Pensions & Investments analysis of company data