Almost 30% of asset managers for European pension funds were involved in mergers or acquisitions in 1999, according to a new survey.
Many of the deals, which involved 54 of the 185 money managers in the study, were motivated by the managers' desire to expand into new countries or market segments, according to consultant William M. Mercer's annual Pension Fund Managers Guide.
In terms of money managed for European pension funds, Barclays Global Investors, London, ranked No. 1 with $106 billion in assets as of June 30. This is due in large part to the increased interest among European pension funds, particularly those in the United Kingdom, in indexing their assets.
Schroder Investment Management, London, was No. 2, with $100.8 billion in assets; Merrill Lynch Mercury Asset Management, London was third, falling from the top spot in 1998, with $100.3 billion in assets.
Phillips & Drew, London, fell to fourth place with $72 billion in assets, down 19% from $88.8 billion in 1998. It has suffered from the poor performance of its value investing style and lost many clients, a development that resulted in the retirement of Chief Investment Officer Tony Dye in March of this year.
The use of index funds has gained a strong foothold in the United Kingdom, with 25% of its total pension fund assets indexed, up from 22% in 1998. Indexing has been slower to catch on in continental Europe, but still grew to 4% in 1999 from 2% in 1998.
There were significant increases in indexing in the Netherlands, Switzerland and Ireland, which are all well-established pension fund markets. Indexed securities now represent between 4.5% and 9% of the pension assets managed in those countries.
"The rise in index tracking has often been a knee-jerk reaction to underperformance by active managers, but more strategically reflects the growing distinction between `exposure' and `added value,' " said Julia Hobart, head of manager advisory services at Mercer and author of the guide.
U.K. fund managers continue to dominate the European market. Of the top 30 fund managers, 18 cited the United Kingdom as at least one of their home countries. The United States was the next most commonly cited home country with seven managers, followed by the Netherlands, with five.
During the past year, 26 of the 54 mergers and acquisitions around Europe involved U.K.-based companies, compared with 16 out of 39 the previous year. Eleven of the 54 mergers involved U.S.-based firms.
Since the introduction of the euro in January 1999 there has been a major shift out of domestic bond mandates, which fell to 506 from 686, into European bond mandates, which have risen to 367 from 123. But the shift is largely a matter of semantics, because domestic bonds became euro-denominated bonds for the eurozone countries.
There also has been a continuing move from balanced accounts to specialist, individual sector accounts generally, and to U.S. equities in particular. The number of specialist U.S. equity mandates doubled to 161, from 81 in 1998.
"The shift from balanced to specialist management is linked with the growth in index tracking," said Ms. Hobart. "Increasingly, pension funds are prepared to pay more for added value and correspondingly less for `exposure.' "
The number of specialist, individual-sector European equity mandates rose 57% in the year ended June 30, according to the guide. There also was a small shift out of domestic equities as a result of the euro.
In terms of global expansion, over the past five years the number of companies claiming two or more home bases increased 150%. The average number of European offices per firm rose to 2.8 as of June 30 from 2.2 in 1996, and 41 firms -- more than one-fifth of those surveyed -- operate out of five or more countries, compared with only 17 firms with offices that widespread in 1996.
The increased staffing levels of fund management firms in the survey also is indicative of global expansion. The average number of professionals employed per firm was 133 as of June 30, compared with 65 three years earlier. The greatest rise has been in client service, marketing and business management staff, which were up 250%, and is needed for their expanded money management operations, according to the Mercer survey .
Foreign firms doubled their market share, up to 8%, of money management for continental European pension funds in the three years ended June 30. The heaviest penetration is in Belgium and the Netherlands.
Foreign penetration of the U.K. pension fund market, which had been rising strongly, appears to have gone into reverse. But in fact what is happening is that many managers that used to be defined as foreign have now set up bases in the United Kingdom, and are thus considered to be partly British under Mercer's definition. Which is, according to the survey, further evidence of globalization.