2018 slump hits active, passive equity managers alike

Equity strategies experienced a noticed decline in U.S. institutional tax-exempt assets last year — a trend felt by both active and passive money managers alike, as neither were exempt from losses caused by a rocky market in 2018.

Assets in active domestic equity strategies dropped 13.9% to $2.32 trillion over the year ended Dec. 31, data from Pensions & Investments' annual survey of the largest money managers found. Meanwhile, passively managed U.S. equity strategies saw an 18.8% decline in assets during the same time period, reporting $2.17 trillion in combined AUM across firms.

Domestic equity products represented the largest share of AUM in equities strategies in the survey.

In 2018, indexing giants Vanguard Group Inc., BlackRock Inc., and State Street Global Advisors were, respectively, the top three money managers as ranked by U.S. institutional tax-exempt assets in passively managed U.S. equity strategies. All but Vanguard, however, experienced noticed asset declines over the year.

BlackRock saw its U.S. institutional tax-exempt assets in passive U.S. equity drop 12.3% to $569.7 billion, and SSGA's assets in this universe dropped nearly 15% during the year to $263.8 billion.

Vanguard's assets in this channel declined only slightly, down 1% to $839.3 billion as of Dec. 31, according to P&I's survey data.

Despite the investor shift to lower-cost passive strategies in recent years, indexed strategies were met with significant asset declines in 2018, including enhanced index domestic equity, which lost 26.2% of assets over the year, with $72 billion in assets as of Dec. 31.

Of note, Geode Capital Management LLC, Boston, did not break out its equity assets for the survey, which contributed to lower asset levels across indexed strategies compared to 2017. Excluding Geode from 2017 comparisons, passive U.S. equity was down 9.1% in 2018 and enhanced index U.S. equity assets were down 19.8%. Geode reported $321 billion in passive U.S. equity institutional tax-exempt internally managed assets as of June 30, 2018, according to P&I's previous index manager survey.

Passive international equity strategies, with $471.5 billion in assets, and enhanced index international equity strategies, with $18.4 billion in assets, each lost 18.6% of AUM during the period, survey data found (down 14.3% and 14.9%, respectively, excluding Geode).

During 2018, the MSCI ACWI ex-U.S. index returned -14.2%.

Among the top three managers of active U.S. equity assets, T. Rowe Price Associates Inc., Baltimore, oversaw the most in internally managed assets for U.S. institutional tax-exempt, with $379.2 billion in assets as of Dec. 31, up 1.95% from a year earlier. Fidelity Investments, Boston, was No. 2, but saw its assets drop 11.4% to $284.2 billion during the same period. The third-largest manager was Capital Group Cos., Los Angeles, which only saw a 1.74% decline in active U.S. equity assets, reporting $240.7 billion.

Even for many equity managers able to attract new mandates from institutions last year, those gains would have been offset by underperformance in the equity markets, said Michael Patanella, a New York-based audit partner and asset management sector leader at Grant Thornton LLP.

"The volatility of the market, I think that created a lot of these losses, which had a negative impact on returns and obviously lowered AUM," he said.

The S&P 500 was down 4.38% last year, and in the fourth quarter alone returned -13.52%.

"In 2018, I don't think there was any kind of halt of people putting money in 401(k) plans … (but) people are somewhat concerned about where the economy is headed, and that could be slowing people from coming into the market and going into riskier asset classes," Mr. Patanella said.

Out of the $14.19 trillion in U.S. institutional tax-exempt assets managed internally across more than 500 money managers in the survey, 52.1% of assets were in stocks, a sizable drop from 54.5% a year earlier, while bonds made up 32.7% of assets, up from 30.2% the prior year.

The remainder of assets in 2018 were across real estate (4.6%), private equity (1.6%), hedge funds (0.5%), cash (4.5%) and other (4%) strategies, the survey found.

While passive equity strategies struggled to grow AUM last year alongside actively managed equity products, total worldwide assets in exchange-traded funds/notes were relatively flat, down 0.3% at $4.14 trillion. Actively managed ETFs, however, received a boost in assets, rising 5.1% with $73.8 billion in worldwide assets.

"I do think the increase and demand for ETFs probably comes down to a demand (among) investors to have a low-cost option, plus some active exposure," said Amanda Walters, a New York-based senior manager at Casey Quirk, a practice of Deloitte Consulting LLP. "Given where we are in investor preferences and behavior, cost has a become a bigger (factor)."

Across all equity strategies for U.S. institutional tax-exempt assets managed internally, the largest money managers saw some of their biggest asset declines in low-volatility and international equity products last year.

International equity assets totaled $1.56 trillion across firms, down 20.1% from Dec. 31, 2017. Additionally, U.S. institutional tax-exempt assets in low-volatility equity strategies dropped 14.4% during the year to $108.8 billion.

Among the 25 money managers with the most assets in low-volatility equity strategies, AUM dropped 2.92% over the year ended Dec. 31 to $108.3 billion, the survey found. During 2018, the S&P 500 Low Volatility index returned 0.27%, while returns for the index were negative in the fourth quarter at -5.22%.

The money manager on the top 25 list with the biggest asset declines was Wells Fargo Asset Management, San Francisco, which saw its U.S. institutional, tax-exempt assets in low-volatility equity strategies drop 45.7% to $3.3 billion.

"As a result of the historic 10-year bull market, where growth equities have been rewarded, investors have not surprisingly moved away from low-volatility equity strategies. In early 2018, in particular, when we saw phenomenal growth in equity values, low-volatility strategies were not rewarded by the market. We would expect this trend to revert at some point," a Wells Fargo spokesman said.

Of note, domestic equity growth managers surveyed emerged from 2018 less bruised than value managers, as the former saw combined assets drop 2.22% to $888.5 billion as of Dec. 31, while value equity assets fell 14.21% to $624.2 billion during the same time period.

During 2018, the Russell 3000 Total Return Growth index returned -2.12%, while the Russell 3000 Total Return Value index returned -8.58%.

Sean Chatburn, principal and head of North America equity manager research at Mercer Investment Consulting LLC, Chicago, said that equity growth managers' more favorable performance last year "shouldn't be a surprise," as this "reflects some of the behaviors of investors in a late cycle."

"In general, the market has been in an uptrend for a while, which has led to a supportive environment (for allocations) to growth managers," particularly quality growth equity managers, he noted.

The survey also found that the largest money managers, by U.S. institutional tax-exempt assets managed internally, saw their emerging markets equity AUM drop 19.7% to $343.9 billion as of Dec. 31.

Mr. Chatburn said that "2018 was a difficult year for allocating to this asset class." The MSCI Emerging Markets index returned -14.57%, he noted.

Lower allocations were driven by several factors, including "heightened volatility, heightened political concerns, currency and interest rate moves, (political) elections, and the rhetoric around a trade war with China," he said.