Managers bashed by worst decline in the past 10 years

Money managers experienced the worst aggregate decline in worldwide institutional assets under management in a decade during the year ended Dec. 31.

Aggregate worldwide institutional assets fell 5.4% to $42.78 trillion, compared with growth of 14.2% in 2017, results of Pensions & Investments' annual money manager survey showed.

Over the 10 years ended Dec. 31, worldwide institutional assets managed by P&I's international universe of asset managers declined in only two other years: down 3% in 2015 to $36.16 trillion and down 0.3% in 2011 to $29.16 trillion.

(See the methodology behind P&I's money manager survey.)

All but one of the 10 largest firms in P&I's ranking of the largest institutional managers worldwide produced AUM declines ranging from 1.46% to 10.65% in the year ended Dec. 31.

Prudential Financial Inc., Newark, N.J., was the lone company within the top 10 to produce a gain in worldwide institutional assets in 2018. Assets managed by PGIM, the firm's investment management unit, rose 0.74% to $1.04 trillion. The gain propelled Prudential to seventh place from 10th the prior year.

"2018 was a tough year for money managers. In very stark contrast, managers had strong asset growth in 2017," said Luba Nikulina, managing director and global head of manager research at investment consultant Willis Towers Watson PLC, London.

"The bulk of the exposure of the largest money managers to market declines was from equities," she said, adding that continued inflows to passively managed strategies, especially to equities, also sapped assets away from active strategies.

The same three megamanagers remained at the top of P&I's list of the largest managers of worldwide institutional AUM as of Dec. 31, despite each experiencing asset losses.

BlackRock Inc., New York, kept a firm but shrinking position as the world's largest manager of institutional assets with $3.62 trillion as of Dec. 31, down 6.7% from the prior year.

Assets managed for worldwide institutional investors by Vanguard Group Inc., Malvern, Pa., declined 1.46% to $3.06 trillion, with the firm keeping its second-place position. Vanguard further eroded the gap between its worldwide institutional AUM and BlackRock's, shrinking the difference to $567 billion in the year ended Dec. 31, from $781.8 billion at the end of 2017 and $899.7 billion in 2016.

State Street Global Advisors, Boston, retained third place, but its AUM decline was larger, dropping 10.65% to $1.88 trillion.

Vanguard continued to widen the difference between its worldwide institutional AUM and SSGA's to $1.18 trillion in the year ended Dec. 31, compared with $998.1 billion in 2017 and $471.6 billion in 2016.

Industry sources attributed the decline in institutional assets managed by P&I's international universe of money managers to market depreciation and declining defined benefit plan assets as corporate plan sponsors continued transferring pension risk to external companies.

Asset class returns in the year ended Dec. 31 were challenging, with the S&P 500 total return index down 4.38%; MSCI ACWI, down 9.41%; Bloomberg Barclays U.S. Aggregate Bond index, up 0.01%; NCREIF Property index, up 6.7%; HFRI (Hedge) Fund Weighted Composite index, down 3.73% on a total return basis; and Cambridge Associates LLC U.S. Private Equity index, up 10.06%.

Among the 50 largest managers of worldwide institutional assets, several firms that primarily manage non-U.S. equity and fixed-income strategies saw double-digit losses in the year ended Dec. 31: BNP Paribas Asset Management, Paris, down 17.29% to $252.9 billion; Aberdeen Standard Investments, Edinburgh, down 15.32% to $542.1 billion; Aviva Investors, London, down 13.43% to $375.4 billion; and Schroders PLC, London, down 10.85% to $308.6 billion.

Sources attributed much of the AUM decline of managers with high exposure to non-U.S. markets to market depreciation and the impact of currency movements in the year ended Dec. 31.

"The decline in assets under management in 2018 is understandable, driven as it was by returns," said Davis Walmsley, managing director-investment management at Greenwich Associates LLC, Stamford, Conn., a financial industry research firm.

Mr. Walmsley added: "We haven't seen much new money coming into the industry except from performance. As corporations continue to derisk their pension funds, AUM is declining."

P&I's data revealed a significant decline of 11.2% in U.S. defined benefit plan assets managed internally by money managers to $3.98 trillion in the year ended Dec. 31. Managers reported aggregate assets managed internally for U.S. defined contribution plans of $5.84 trillion as of the same date, down 5.2% from the prior year while assets managed internally for U.S. endowments and foundations dropped 9.4% to $599.3 billion.

Overall, worldwide assets managed by the 528 managers who responded to P&I's annual survey totaled $64.08 trillion as of Dec. 31, down 5.1% from year-end 2017.

Among the strategies with the highest growth in worldwide assets under management in the year ended Dec. 31:

• Actively managed exchange-traded funds were up 5.1% to $73.8 billion.


• Liability-driven strategies increased 4.7% to $3.04 trillion for the year.


• Investment outsourcing/fiduciary management mandates were up 2.1% to $1.55 trillion.

The growth in assets managed in LDI approaches is "quite significant on top of market moves last year, and there also was a fair amount of growth in other fixed-income strategies," said Willis Towers Watson's Ms. Nikulina

NISA Investment Advisors LLC, St. Louis, not only had the highest AUM growth — 16.8% to $170.5 billion — among the 25 largest managers of internally managed U.S. institutional tax-exempt assets as of Dec. 31, it also experienced strong growth in worldwide LDI assets of 14.69% to $143.1 billion.

NISA was "in a position to profit" from an ideal environment for growth in its LDI strategies in 2018 as corporate plan sponsors derisked their plans by harvesting equity gains from strong markets through the third quarter and moving them into LDI strategies, said David G. Eichhorn, president and head of investment strategies.

Another source of net inflows into LDI strategies in 2018 was the big wave of pension contributions as corporations raced to take a 35% tax deduction by Sept. 15 in advance of the lower deduction rate decreed by the Tax Cuts and Jobs Act, Mr. Eichhorn said.

NISA had net inflows of $30 billion in 2018 with most of that growth coming from LDI strategies. The firm also had strong net inflows of $15 billion in 2017, Mr. Eichhorn said.

Drilling down into data from money managers about their U.S. institutional clients exposed the same pattern of AUM declines in each of P&I's primary client categories in the year ended Dec. 31.

U.S. tax-exempt assets declined 9.2% to $19.05 trillion, while U.S. institutional tax-exempt assets dropped 8.3% to $15.82 trillion in the year ended Dec. 31.

U.S. institutional tax-exempt assets managed internally were down 7.8% to $14.19 trillion, compared to an increase of 11.3% in the prior year.

As with worldwide institutional assets under management, the aggregate decline in AUM managed internally for U.S. institutional tax-exempt investors in 2018 was the worst in the 10 years ended Dec. 31 and the third drop in that span — AUM fell 5.6% in 2011 and 2% in 2015.

The triad at the top of P&I's worldwide institutional AUM ranking retained their positions for internal management of U.S. institutional tax-exempt assets, with BlackRock at $1.41 trillion, down 8.1% compared to the prior year; Vanguard Group, up 0.64% to $1.21 trillion; and SSGA, down 10.99% to $857.7 billion. Vanguard was one of four managers in the top 10 to record an increase in AUM in 2018.

Aggregate assets of every traditional equity strategy internally managed for U.S. institutional tax-exempt investors in P&I's universe, both passive and active, declined in the year ended 2018.

Fixed-income strategies, on the other hand, experienced modest growth in most internally managed subasset classes, with active international fixed income up 4.8% to $371.2 billion; indexed U.S. bond strategies up 3.9% to $774.5 billion; enhanced indexed U.S. bonds up 3.6% to $81.8 billion; and inflation-protected securities up 2.7% to $126.3 billion.

PGIM's overall and asset class AUM gains benefited from strong performance across its wide investment range, which is tilted toward fixed income but also includes private credit, real estate and other alternatives, Chief Operating Officer Taimur Hyat said.

Mr. Hyat credited the firm's 0.74% growth in assets managed worldwide for institutions to a net inflow of $13.7 billion — the firm's 16th consecutive year of net inflows — driven by strong interest diversifying strategies such as fixed-income relative value, real estate debt and all forms of private credit.

"The backbone of our success is the performance of our strategies, which is our primary objective," Mr. Hyat said, noting that 92% of PGIM's benchmarked strategies outperformed over the five-year period ended Dec. 31.

Asset owner interest in alternative investment strategies remains high as a diversification tool to reduce equity and bond risk and to improve returns, said Willis Towers Watson's Ms. Nikulina.

Of the 15 alternative investment strategies P&I tracks from its manager survey, eight had positive AUM growth in 2018 led by the 66.4% increase to $11.52 trillion managed internally using environmental, social and governance investment processes for U.S. institutional tax-exempt investors.

"There's definitely interest and growth in ESG investment by U.S. asset owners, but the uptake lags Canada and Europe in adoption and implementation," Greenwich Associates' Mr. Walmsley said.

One reason for that hesitation may be the chronically underfunded status of many U.S. public defined benefit plans, he said.

In terms of geography, P&I survey data showed that as of Dec. 31, 63% of money managers' aggregate worldwide AUM is from U.S. investors; Europe ex-U.K., 14%; U.K., 8.4%; Japan, 3.6%; Canada, 3.2%; Asia ex-Japan and China, 2.7%; other, 2.7%; and Australia, 1.5%. And 0.9% of total worldwide investment industry assets are from Chinese investors, a new question in the survey.