Fourth-quarter market plunge pulls most firms down for year

For most money managers of defined contribution assets, 2018 will go down as a year they'd rather forget.

Money managers posted an overall decline in their defined contribution assets at the end of 2018, dropping 5.4% to $6.693 trillion from $7.076 trillion the year before, according to Pensions & Investments' annual survey of the largest U.S. institutional money managers.

Among the top 25 managers, all but three — Vanguard Group Inc., T. Rowe Price Associates Inc. and Mercer Investments LLC — showed declines in assets, with five posting double-digit drops in asset value.

The declines were due in large part to last year's market downturn in the fourth quarter, according to industry experts.

"I think the decline in assets simply mirrors the performance of the capital markets and the asset mix of defined contribution plans," said Michael Volo, senior partner at Cammack Retirement Group Inc. in Wellesley, Mass.

Jason Shapiro, director of investments at Willis Towers Watson PLC in New York, noted that global equities, as measured by the MSCI ACWI, slid 9.4% in 2018, while the Bloomberg Barclays U.S. Aggregate Bond index was flat for the year.

The fact that defined contribution plans tend to be equity-heavy didn't help, Mr. Shapiro said. Target-date funds, which are popular in defined contribution plans, have high equity weights with median return-seeking allocations for participants 40 years to retirement at 90%, according to Willis Towers Watson's target-date research team.

Few money managers escaped the wrath of the market, regardless of whether they employed passive or active strategies, P&I's survey showed. State Street Global Advisors, a passive manager, for example, suffered a 10.64% decline in assets, while Fidelity Investments and Nuveen, both predominantly active managers, endured drops of 6.78% and 4.77%, respectively.

State Street's assets fell to $297.27 billion, ranking seventh among the largest DC money managers. Fidelity and Nuveen, meanwhile, saw assets slide to $666.4 billion and $507.78 billion, respectively, putting them in third and fourth place.

Vanguard, T. Rowe Price and Mercer, however, bucked the trend. Vanguard, a leader in passive investing, managed to boost assets by 2.88% to $1.18 trillion, while T. Rowe Price, mainly an active manager, pulled off a 2.62% increase, bringing its assets to $413.1 billion to remain in fifth place for managing DC assets.

Mercer, a firm that manages none of its defined contribution assets internally, delivered the biggest jump; its assets increased 13.75% to $54.6 billion in 2018.

Vanguard, the largest U.S. DC money manager, attributed the 2.88% increase to its target-date funds and low-cost products. "Target-date funds have really been driving that asset growth," said James Martielli, the Valley Forge, Pa.-based head of defined contribution advisory services, noting that Vanguard got an estimated 54 cents for every dollar that went into all target-date funds.

"Plan sponsors and ultimately their participants have been gravitating toward low-cost, broadly diversified, straightforward, all-in-one type of products," Mr. Martielli said.

T. Rowe Price also attributed the increase in part to its target-date funds, which it said generated about $12 billion in net flows during 2018. "We attribute much of that growth to our focus on delivering unique retirement thought leadership to plan sponsors and helping their plan participants achieve their retirement goals by generating excellent net-of-fee outcomes," said Christopher Newman, vice president and head of Americas for T. Rowe Price in Baltimore.

T. Rowe's Blue Chip Growth fund, its largest, was the only equity fund to grow both organically through market appreciation and through new asset flows, swelling to $50.48 billion at the end of 2018, according to data from Bloomberg. The fund defied the market, earning 2.14% on a total return basis for the year.

Mercer, in contrast, chalked up the increase to a strategic initiative to shift its focus to defined contribution plans from defined benefit plans. "Our breadth of intellectual capital and scale allows participants to have access to high-quality money managers that they would not be able to access themselves," said Rich Joseph, the Boston-based chief operating officer of Mercer's investment management business in the Americas. He said the firm allocates client money to a combination of active and passive asset classes.

To Mr. Volo's way of thinking, money manager flows are driven primarily by "the secular shift away from active management, strength in the target-date space and outperformance in a firm's widely held funds," he said.

"If you think of an asset manager that epitomizes those three things, it's Vanguard," Mr. Volo said.

T. Rowe met two of the three criteria, he said — the firm was a leading player in target-date funds and posted strong performance in its domestic equity funds.

Greg Allen, CEO and chief research officer at Callan LLC in San Francisco, agrees that strength in target-date funds helped boost asset flows. The biggest players in the TDF space — namely Fidelity, T. Rowe Price and Vanguard — are getting the "lion's share of the net inflows" and "everyone else is getting 401(k) outflows," he said.

Despite its strength in target-date funds, Fidelity nevertheless posted a 6.78% asset decline, the second-worst drop of the 10 largest managers. The firm attributed the drop to last year's market downturn.

Like Mr. Volo, Mr. Allen believes that passive managers held an advantage in capturing assets. Passive managers that posted asset decreases last year likely did not get enough flows to offset the losses in the equity market, he said.

BlackRock Inc., a mainly passive player that saw its assets shrink 2.96% to $829.83 billion and remained ranked second, for example, has a lot of equity strategies and equities lost significant value in 2018, Mr. Allen said.

Other reasons too may have accounted for asset declines among passive managers, according to Mr. Volo. State Street Global Advisors, a largely passive manager that saw its assets drop 10.64% to $297.28 billion, was likely hurt by fee competition on its index funds, he said. It also doesn't have a dominant position in target-date funds.

Among the top 25 money managers, Manulife/John Hancock, Dodge & Cox and Dimensional Fund Advisors LP saw the sharpest declines, sliding 13.78%, 13.72% and 12.05%, respectively, to $65.3 billion, $87.98 billion and $52.67 billion.

Manulife/John Hancock did not respond to a request for comment on its asset decline. Dodge & Cox, which manages active strategies only, said the decline was driven in large part by equity market fluctuations in the fourth quarter of 2018. Dimensional Fund Advisors, another active manager, also attributed its asset decline to market movements.