Manager assets grow, but at uneven strides

Worldwide institutional and U.S. institutional tax-exempt assets of the 500 largest money managers rebounded into a growth mode in 2012, but that growth was uneven.

Worldwide institutional assets under management had the biggest bump, up 10.47% from year-end 2011 to $32.15 trillion. U.S. institutional tax-exempt assets managed by the largest 500 managers rose a more modest 6.76%, reaching $11.59 trillion at the end of 2012, according to Pensions & Investments' annual money manager survey.

The growth momentum went beyond institutional assets, with overall assets under management of the top 500 managers growing 9.7%, to $46.76 trillion as of Dec. 31.

A year earlier, by contrast, worldwide institutional assets of the 500 largest managers were flat and U.S. institutional tax-exempt AUM had dropped 5.3% after two years of growth.

Despite the positive news, U.S. institutional tax-exempt institutional assets of the 500 largest managers still have not fully recovered to the pre-financial crisis level of $12.38 trillion at year-end 2007.

Among individual money management firms in 2012, BlackRock Inc. and State Street Global Advisors maintained their top rankings, with $2.59 trillion and $1.67 trillion, respectively, in worldwide institutional assets under management.

BlackRock, however, saw only a 3.1% increase in worldwide institutional assets in 2012. Among the top 10 managers, only sixth-rated Fidelity Investments had a smaller increase, 1.7%. In contrast, Pacific Investment Management Co. LLC moved to third from fourth the prior year on the strength of a 28% increase in worldwide institutional assets, the best among the top 10 managers. The Newport Beach, Calif., firm had $1.43 trillion in worldwide institutional assets as of Dec. 31.

Douglas Hodge, managing director and chief operating officer, cited two main reasons for the firm's boost in worldwide institutional assets. “There has been this global tail wind of derisking and deleveraging that began post-crisis,” which has created flows worldwide “from every channel PIMCO serves,” he said. “We've been well positioned to do this. The other source is asset allocation. We've been one of the leaders in asset allocation solutions, and that includes gaining mandates from institutional investors.”

Also moving up in the survey was Vanguard Group, which finished fourth in worldwide institutional assets in 2012, up from fifth a year earlier. Vanguard finished 2012 with $1.33 trillion in assets, up 24.3%.

“We were blessed with strong equity markets in 2012,” said Chris McIsaac, managing director of Vanguard's institutional investor group.

He said Vanguard was also able to benefit from strong flows by institutional investors into its index funds in 2012. “Institutional clients seemed to embrace indexing as a core part of their strategy.”

BNY Mellon Asset Management fell to fifth place from third, despite a hefty 10.7% increase in worldwide assets to $1.25 trillion. Cynthia Steer, head of manager research and investment solutions, said BNY Mellon's gains came from several areas, including helping pension fund clients worldwide implement liability-driven investing strategies and helping institutional investors in general with enhanced indexing.

Institutional investors were sticking with some selective equity risk but also wanted to reduce risk and manager fees by looking at the smart beta solutions, Ms. Steer said.

Among managers of U.S. institutional tax-exempt assets, BlackRock, SSgA and Fidelity maintained their one-two-three ranking. BlackRock achieved a 10.3% increase to $917.46 billion.

Of the eight firms that made both the worldwide and U.S. institutional tax-exempt top 10, BlackRock and Fidelity were the only ones to do better in gaining U.S. institutional tax-exempt assets than worldwide institutional assets.

Improved, but volatile, equity markets played a key part in the increased AUM, consultants said. The MSCI All-Country World index returned 16.5% in 2012 compared with -7.35% in 2011. The MSCI Europe Australasia Far East index returned 17.94% in 2012 compared with -11.3% in the previous year. The Russell 3000 index rose 16.4% for the year.

The bump-up in equity, however, was partially offset by lower growth rates in fixed income. The Barclays Capital Aggregate Bond index was up 4.2% in 2012 from the prior year, but it was less of an increase than the 7.8% climb in 2011. The Citigroup World Government Bond index, hedged, returned 4.5%; a year earlier it had been 5.49%.

David Hunt, president and CEO of Newark, N.J.-based Prudential Financial's investment management business, said strong increases in assets in 2012 could be attributed mainly to net inflows. Prudential saw a 16.5% increase in worldwide institutional assets to $790.8 billion, while U.S. tax-exempt institutional assets grew 14.2% to $377.6 billion.

Mr. Hunt said Prudential was able to take advantage of its global footprint in gathering assets. Prudential also gained with the risk transfer that took place when the firm annuitized pension assets of General Motors Co. and Verizon Communications Inc. in 2012.

Consultants said the larger increase in worldwide institutional assets can be attributed to a variety of factors.

“A lot of U.S. corporate plans paid out a ton of lump-sum payments to take advantage of interest rate movements during the year” said Carl Hess, global head of investment at Towers Watson & Co., New York. “It was enough to move the dial.”

Mr. Hess said federal regulations that went in effect in 2012 also lowered contributions into corporate defined benefit plans.

Overall, consultants said, the U.S. institutional tax-exempt marketplace isn't growing at the pace of some foreign markets, particularly in Asia and Latin America. New defined contribution programs in countries like Malaysia and Singapore are helping money managers grow worldwide assets, they said.

Indeed, managers are thinking globally. Assets from U.S.-based clients dipped during 2012, accounting for 64.8% of worldwide assets among all managers responding to the most recent survey. That's down 1.2 percentage points from year-end 2011. Assets from clients in the U.K. also dropped — to 8.1% from 8.4%. Gains were seen in assets from Europe, 12.6% at year-end 2012 from 11%; Asia (ex-Japan), to 2.8% from 2.6%; and Japan, to 3.9% from 3.7%.

“It's not too surprising because the U.S. is a more mature market than almost all the other markets,” said Jeffrey Margolis, founder and partner in money management consulting firm Margolis/Kass Advisors Inc., Roslyn Heights, N.Y. “On average, you would expect assets in the more immature markets to be growing on a more secular basis faster.”

Another factor is that defined contribution withdrawals in the U.S. exceeded inflows as a growing segment of the population in the U.S. reached retirement age, said Ben Phillips, a partner at Casey, Quirk & Associates LLC, Darien, Conn., a consultant to money managers.

Mr. Phillips said organic growth coming into the money management industry in the next five years will mostly be from Latin America and Asia. But he said the largest revenue opportunities will be from manager turnover in the U.S. and Europe, which runs about 20% a year.

For the first time, managers are running more assets internally for defined contribution plans than for defined benefit plans. Managers had $3.89 trillion under internal management for DC plans in 2012 vs. $3.66 trillion for DB plans. Towers Watson's Mr. Hess said the growth of DC plan assets was in effect a reflection of the maturation of DB plans and a natural evolution.

Another big source of growth for managers in 2012 was sovereign wealth funds. Assets managed for sovereign wealth funds totaled $1.23 trillion, up 55.7% from the prior year.

“It is money flowing from the West debtor nations to the East creditor nations,” Mr. Hess said.

He said some sovereign wealth funds have grown so big they have been forced to expand investment horizons beyond their local economies and hire money managers firms outside their borders to manage part of their assets.

But Mr. Hess said “how sustainable” that growth will be is an open question. As sovereign wealth funds become bigger, they will be building in-house investment capabilities that will reduce the amount of money available to asset management companies, he said.

Increased allocations from some of its 23 sovereign wealth fund clients helped SSgA achieve a 9.8% hike in worldwide institutional assets, said Scott Powers, Boston-based SSgA president and CEO. Mr. Powers said SWFs, especially those in emerging markets where commodities are pumping new money into the economy, gave SSgA new allocations in 2012.

One trend that continued in 2012 was the rate of growth among index strategies vs. active strategies. Passive domestic equity assets grew 15.2% in 2012, while passive domestic fixed income grew 11.46%. In comparison, active domestic equity grew 5.3%, while active domestic bonds increased 3.2%.

Once adjusted for the index gains, there actually was a decline of 9.7% in active equities, while passive equities were relatively flat; but for fixed income, active strategies were flat, while assets invested in passive portfolios grew 7%. Passive international equity assets increased 23.5% to $336 billion in 2012, and were still up 5.2% after adjusting for market gains. Passive international fixed income was up 66% to $9.49 billion.

Mr. Margolis said the continuing shift to index strategies is because asset owners increasingly are questioning whether they have the ability to pick active managers that can outperform their benchmarks. “There have always been studies that the majority of active managers don't outperform, but since the financial crisis, every active manager has been scrutinized,” he said.

Overall, international investments were up 17% to $1.533 trillion. International equity assets rose 15.1% to $1.26 trillion, while international fixed income rose 27.3% to $270 billion in 2012.

After adjusting for the 4.5% gain in the Citigroup World Government Bond index, international fixed income increased 21.9%. Equities had a 2% decrease after adjusting for the 17.4% gain in the MSCI Europe Australasia Far East index.

There were no major changes in the managers' asset allocations from year-end 2011, for either worldwide or internally managed U.S. institutional tax-exempt assets. In both cases equities gained (to 40.3% from 38.5%, and 46.6% from 44.7%, respectively) while bonds lost (to 36.5% from 37% and 36.6% from 37.5%, respectively).

Reporter Rick Baert also contributed to this story.