Market rise lifts institutional assets 14.4%

Worldwide institutional assets under management at more than 500 money managers tracked by Pensions & Investments were bolstered by a strong year in the markets in 2019, growing 14.4% to $48.84 trillion over the year ended Dec. 31, an annual survey of the largest managers found.

Overall, total worldwide assets at all managers surveyed was $74.9 trillion, up 16.9% for the year and 34.6% for the five-year period ended Dec. 31.

But the surge in assets came just before firms were rocked by the impact of the coronavirus pandemic, which has already changed the trajectory of AUM for many money managers.

The AUM as of March 31 of 89 of the 100 largest managers — as collected by P&I through public data and information provided by firms — declined by 10.43% to $58.17 trillion from $64.94 trillion as of Dec. 31.

AUM fell in tandem with the March onset of the health crisis and lockdowns in the U.S. as valuations of large companies dropped precipitously. As of March 23, the S&P 500 was down 30.4% year-to-date, marking a low for the year. As of May 28, the index was down 6.03% in 2020 and AUM experienced a rebound from the end of the first quarter.

This was in comparison to 2019 when the S&P 500 surged 31.5%.

While the outlook for many money managers has weakened, industry sources expect some trends from 2019 to continue, such as the flight to low-cost passive strategies by institutional investors.

While some in the industry wonder whether 2020 will prompt a resurgence for actively managed assets amid market volatility, Kevin Quirk, a Stamford, Conn.-based principal at Casey Quirk, a practice within Deloitte Consulting LLP, said passive growth will likely continue to outpace that of active assets."I don't think the crisis is going to slow it down; in fact, it may modestly accelerate this move to passive," Mr. Quirk said.

Over the year ended Dec. 31, the largest managers of U.S. institutional tax-exempt assets managed internally saw passive domestic equity assets grow by 37.1% to $2.98 trillion, while passive domestic fixed-income assets grew 16.1% during the period to $898.4 billion. Over the five years ended Dec. 31, passive domestic equity assets grew 67.2% from $1.78 trillion, while passive domestic fixed-income assets grew 71% from $525.3 billion.

In comparison, active domestic equity assets among the managers of U.S. institutional tax-exempt assets managed internally increased 11.7% to $2.59 trillion for the year ended Dec. 31 and active domestic fixed-income assets grew 10% over the year to $3.34 trillion, survey data found. Over the five years ended Dec. 31, active domestic equity assets grew only 5.3% up from $2.46 trillion, while active domestic fixed-income assets grew 14.2% from $2.93 trillion.

Of note, passive international equity assets saw the fastest growth last year among indexed strategies, growing 37.6% to $647.6 billion. Over the five years ended Dec. 31, passive international equity assets grew 45.1%, up from $446.2 billion.

Matthew C. Brancato, Malvern, Pa.-based principal and head of Vanguard Group Inc.'s institutional investor services group, said the growth in passive international equity assets is driven by both cost pressures in the industry and portfolio diversification among institutions.

"When we look at the trends that have been playing out for long periods of time now, what we are seeing that is really driving the movement of assets from active to passive has more to do with cost than anything else. It's not first about the strategy itself," Mr. Brancato said.

He added, however: "Investors are increasingly looking for diversification" — and international and global equity exposure is part of that.

"In the institutional space, in particular, one of the conversations we tend to have is about (equity) valuations. … The international equity space does look to provide attractive valuations, and therefore attractive returns," Mr. Brancato continued.

The MSCI ACWI ex-U.S. index is down 14.33% year-to-date through May 28 and the MSCI ACWI is down 9.2%.

Vanguard was the third-largest money manager of passive international equity assets as of Dec. 31, with $73.3 billion in internally managed U.S. institutional tax-exempt assets in this universe, up 34% for the year. The top two managers were BlackRock Inc., New York, and State Street Global Advisors, Boston, which respectively had $307.8 billion and $115.3 billion in passive international equity assets and were up 51.5% and 20.4% for the year.

For the year ended Dec. 31, the three largest managers of U.S. institutional tax-exempt assets managed internally were BlackRock, Vanguard and State Street Global Advisors, retaining their positions over the previous year.

BlackRock remained in the top spot with $1.93 trillion in assets in this universe, growing 36.4%, followed by Vanguard, which had $1.6 trillion at the end of the year, up 32.2%; and State Street, which grew 18.3% during the year, breaking the $1 trillion mark. As of Dec. 31, the firm had $1.01 trillion in assets in the universe, compared to $857.7 billion a year earlier.

While Casey Quirk expects passive players to claim more assets this year as investors focus on low-fee strategies, some sources have said certain active managers may have the opportunity to shine this year, too, given the focus on active stock selection in volatile markets.

Charlie Ruffel, managing partner and chairman at Kudu Investment Management LLC, a New York-based capital provider for asset and wealth management firms, said 2020 is "going to be a good time for active boutiques that can demonstrate that they can add performance," and that "money will flow to a lot of managers" that outperform.

"It's been a long time since active managers could demonstrate their value among their peers and vs. passive managers," he continued.

Mr. Ruffel added that he "wouldn't bet against all of the big players" such as BlackRock, Vanguard and State Street — and even some larger alternatives firms.

"I think they will continue to grow. But I think you'll find this will be a good time for boutiques as well," he said. "There are a lot of people who believe a lot of the managers in the middle will struggle. I think if the managers in the middle have done well in this environment, they can really demonstrate why you should be giving them assets. But for the ones who haven't, this is a bit of an existential threat," Mr. Ruffel said.

Luba Nikulina, global head of research at Willis Towers Watson PLC in London, said the coronavirus crisis and resulting fallout in the markets will just exacerbate and accelerate longer-term trends facing money managers.

Larger diversified firms and some niche active managers may be able to compete, but "it will become even harder for midsize managers to continue to be successful," Ms. Nikulina said.

Most managers falling in the middle of the pack, by worldwide institutional AUM, lagged the asset growth seen among the largest money management firms, P&I's survey found. Of the 11 money managers with at least $1 trillion in worldwide institutional AUM, five saw their AUM rise 22% or more over the year ended Dec. 31. Only 11 of the next 50 largest managers matched that growth, with a couple benefiting from acquisitions during the year.

Furthermore, the extreme volatility in the markets has been hard for active managers to handle.

"Here, we have massive volatility, but when we speak to active managers now, it's really hard because at the moment there is so much uncertainty with all of these factors that are beyond financial forecasts," Ms. Nikulina said.

"Actions by governments and central banks are just unprecedented ... You cannot rely on the past. When we drew forecasts, we would usually draw from the past. I'm pretty sure it will result in opportunities for some active managers. But you really need to be very smart to navigate," she said.

One area of active management that has seen large growth is in exchange-traded funds. Last year, the largest money managers saw assets in actively managed ETFs and exchange-traded notes grow 34.7% to $99.4 billion. Over the five years ended Dec. 31, assets in these products grew 408.1%, up from $19.6 billion.

The largest active ETF/ETN manager was Pacific Investment Management Co. LLC, Newport Beach, Calif., which sponsored $25.3 billion in worldwide assets in these vehicles, up 21.7% over the year ended Dec. 31.

State Street Global Advisors had $7 billion in active ETF assets as of Dec. 31, making it the fifth-largest manager in the universe. The firm's active ETF assets grew 15.6% over the year.

"As the SEC approves new active structures, we do anticipate that we will see the active ETF space continue to grow," said Susan Thompson, a Scottsdale, Ariz.-based executive vice president at State Street Global Advisors who is head of SPDR Americas Distribution, in an email.

In May 2019, the SEC approved the first non-transparent actively managed ETF structure for Bedminster, N.J.-based Precidian Investments LLC.

"There are two primary drivers of the rise in active ETF growth within the SPDR business," Ms. Thompsons wrote. "The first is that investors are very open (and some prefer) active management in the fixed-income space. We have seen significant increases in our actively managed fixed-income lineup, especially in products such as senior loans...The second is that certain active funds are used in our model business to allow portfolio managers to engage in more active asset allocation and our model business has been growing rapidly."

Among the largest money managers of internally managed U.S. institutional, tax-exempt assets, the average asset mix was 53% stocks, up from 52.1% the prior year, and 31% bonds, down from 32.7% as of Dec. 31, 2018.

Cash accounted for 4.5% of AUM, remaining the same over the previous year. Real estate assets accounted for 3.9%, down from 4.6%; private equity was down to 1.2% from 1.6%; and hedge funds were down slightly to 0.4% from 0.5%. Assets in all "other" strategies were up to 6% from 4% the year prior.

Among the largest money managers by worldwide AUM, liability-driven investing assets continued to rise, growing 9.4% over the year ended Dec. 31 to $3.41 trillion. Over the five-year period ended Dec. 31, LDI assets grew 53%.

Defined contribution assets managed internally by firms also increased over the year, up 18.7% to $6.94 trillion. DC assets again outpaced internally managed DB asset growth, which was 7.3% for the year representing $4.33 trillion.

Vanguard, BlackRock and Fidelity Investments Inc., Boston, were respectively the largest managers of DC assets in the U.S. institutional tax-exempt universe. Vanguard had $1.52 trillion as of Dec. 31, while BlackRock had $1.04 trillion and Fidelity $857.1 billion.

Among the 10 largest managers of U.S. institutional tax-exempt assets managed internally, Geode Capital Management LLC, Boston, saw the fastest growth in assets over the year ended Dec. 31, up 50.6% at $566.7 billion. Geode was the seventh-largest manager in this universe, up from No. 10 the year prior.

By worldwide institutional AUM, Geode also jumped from No. 30 the previous year to No. 21 for the year ended Dec. 31, with $584.3 billion in assets, up 50.5%.

Among the five largest managers of worldwide institutional AUM, BlackRock again was on top, with assets up 23.5% to $4.48 trillion. It was followed by Vanguard, up 29.6% to $3.96 trillion, and SSGA, up 13.4% to $2.13 trillion. London-based Legal & General Investment Management (Holdings) Ltd., rose to the fourth spot, up from No. 5 last year, with $1.53 trillion as of Dec. 31, a 22.2% increase in assets.

BNY Mellon Investment Management, Boston, was bumped down to No. 5, with $1.51 trillion in worldwide institutional AUM, a 9.4% increase over Dec. 31, 2018.