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Money Management

SSGA failing to keep pace in passive assets marathon

CEO Cyrus Taraporevala stressed that SSGA is ready to right its ship.

Firm vows to change despite continuing to lag major competitors

State Street Global Advisors is losing the race for dominance in passive money management.

SSGA, Boston, remains in the triad of managers with more than $1 trillion in passive assets, but over the past five years has dropped from second place to a distant third behind BlackRock (BLK) Inc. (BLK) and Vanguard Group Inc., Pensions & Investments' data showed.

SSGA is ready to change, said Cyrus Taraporevala, SSGA's president and CEO in a telephone interview.

"We aren't happy about SSGA's results," Mr. Taraporevala said, stressing "there's work ahead of us."

Sources questioned whether SSGA can right its investment management business given missteps made by the unit's bank parent company, State Street Corp. (STT), which might deter investors.

For example, in the decade since the 2008 financial crisis, the bank's asset servicing and custodial business, State Street Bank and Trust Corp., was involved in lawsuits and subsequent settlements with institutional investors over post-crisis losses in securities-lending pools and frozen collateral pools as well as inflated foreign-exchange trading pricing in custodial accounts.

But sources attributed SSGA's failure to keep pace with its rivals as much to the intensely focused competitiveness of BlackRock, New York, and Vanguard, Malvern, Pa., to grow their passive businesses as to specific problems within the Boston-based investment management unit.

"For any index provider trying to increase their business, the competition from BlackRock and Vanguard is fierce. They are incredibly powerful asset-gathering machines with a laser focus on growth," said Timothy Barron, senior vice president and chief investment officer in the Chicago office of investment consultant Segal Marco Advisors.

For example, SSGA's worldwide passively managed AUM rose by $355 billion, or 21.1%, to $2.039 trillion in the five years ended June 30, analysis of P&I survey data showed.

By comparison, BlackRock managed a total of $4.153 trillion in passive assets worldwide, up 80.1% or $1.857 trillion in same period, taking the top spot on P&I's indexed fund manager list. Over the same period, worldwide passive assets managed by Vanguard grew even more — 146.5% or $2.292 trillion — to $3.855 trillion. Passive assets under management worldwide as of June 30 were provided by each firm in response to P&I's annual survey of index fund managers.

Third in ETFs

Sources also emphasized the irony in SSGA holding third place in the ranks of ETF managers, given that the firm launched the first U.S.-listed exchange-traded fund — SPDR S&P 550 — in 1993.

As of Dec. 31, BlackRock (BLK)'s ETF assets totaled $2.903 trillion; Vanguard managed $1.729 trillion; and SSGA, $604 billion.

Olivia Offner, an SSGA spokeswoman, said the firm declined to comment about the reasons behind its slower growth in passive assets over the five-year period.

SSGA is particularly vulnerable to investor outflows and market impact because a high percentage — 80.6% — of SSGA's total $2.511 trillion of assets was managed passively as of Dec. 31, 58.3% of which was in indexed equities, according to State Street's fourth-quarter earnings report, industry observers stressed. SSGA's total equity assets declined 11.5% to $1.54 trillion in the year ended Dec. 31, its latest earnings report showed. About 95% of these assets were passively managed.

"Passive management, especially in equities, is a huge business for the biggest managers in the industry, but many big institutional investors are drastically reducing equities" as they shift to liability-driven investing and internal management of indexed assets or reduce equity risk by moving assets into alternative and fixed-income strategies, said J. Tyler Cloherty, a senior manager at Casey Quirk, a business of Deloitte Consulting LLP, New York.

Sources also noted that even as Vanguard and BlackRock significantly expanded their defined contribution businesses over the five years ended June 30, SSGA has been much less successful in attracting DC plan assets.

SSGA's passive assets managed for U.S. defined contribution plans totaled $209 billion, up 15.3% in the five years ended June 30.

Vanguard led the trio with $865 billion managed in indexed assets for U.S. defined contribution, up 135.9% from five years earlier, while BlackRock ran $600 billion in indexed strategies, a 93.8% increase.

Plug-and-play

Segal Marco's Mr. Barron said Vanguard has done a particularly good job of building a platform for defined contribution plans that combines active, passive and target-date funds with robust record keeping.

"SSGA makes it harder for defined contribution plans to hire them compared to the plug-and-play features offered by both Vanguard and BlackRock (BLK)," said a second source who spoke on condition of anonymity. That source also said that SSGA's fees for passively managed DC plan options are higher than those of BlackRock and Vanguard.

According to published mutual fund reports, SSGA's expense ratio was 0.29% for the State Street Target Retirement 2040 Retirement Fund institutional class for a $1 million minimum investment, compared to 0.16% for the BlackRock LifePath Index 2040 Fund institutional shares for a $2 million minimum investment. The retail Vanguard Target Retirement 2040 Fund has an expense ratio of 0.14% with a minimum $1,000 investment. The Vanguard Institutional Target 2040 Retirement Fund institutional share is available for plans with at least $100 million in assets, at a 0.09% fee.

"The problem for State Street is that DC is where most of the industry flows are going," the source said.

Casey Quirk's Mr. Cloherty stressed that "the channel mix is very important to passive managers now and they have to develop these new sources of assets" including defined contribution plans, retail, wealth management, outsourced CIO and multiasset-class investors.

Many of SSGA's challenges predate Mr. Taraporevala's appointment as CEO at the end of 2017.

Sources interviewed by Pensions & Investments when Ronald P. O'Hanley was appointed president and CEO of SSGA in 2015 as well as when his predecessor Scott Powers was named in 2008 also focused on the firm's need to find a sustainable growth path in both passive and active strategies. During that 2015 interview, Mr. O'Hanley also noted the firm's "very formidable competitors."

Mr. Taraporevala's solution for setting SSGA back on track includes renewed focus on SSGA's specialty investment units such as multiasset solutions, including target-date funds, ETFs, and environmental, social and governance investments, he said.

SSGA lags in passive
Compared to its top two rivals, State Street Global Advisors is losing the indexed-assets race. Assets are in millions.
Worldwide indexed assetsAUM as of 6/30/18Change from 6/30/13
BlackRock (BLK)$4,153,256 80.8%
Vanguard$3,855,215 146.5%
SSGA$2,038,885 21.1%
Total U.S. institutional, tax-exempt indexed assets
BlackRock$1,085,810 63.5%
Vanguard$1,087,853 137.8%
SSGA$675,789 10.6%
Total U.S. institutional, DB indexed assets
BlackRock$433,906 36.6%
Vanguard$29,727 -16.5%
SSGA$295,779 5.2%
Total U.S. institutional, DC indexed assets
BlackRock$600,136 93.8%
Vanguard$865,323 135.9%
SSGA$208,553 15.3%
Source: P&I survey

Portfolio construction

Portfolio construction — which is handled by the firm's multiasset-class team — is growing in importance to investors and therefore to SSGA, Mr. Taraporevala said.

"We decompose and recompose portfolios for investors" to meet specific goals, he said, noting that approaches range from more simple market-cap-weighted indexed portfolios to factor-based strategies, target-date funds, active management, overlays, currency hedging and OCIO services.

SSGA also needs to "let clients know more about our actively managed equity and fixed-income strategies," Mr. Taraporevala said.

He said SSGA increased its active equity and fixed income, alternatives and investment outsourcing capabilities with acquisitions of Bank of Ireland Asset Management in 2011 and GE Asset Management in 2016.

As for future acquisitions, Mr. Taraporevala said SSGA is "open to the idea of acquisitions" and always keeps an eye out but he couldn't provide any details.