Vanguard takes institutional lead over BlackRock

In the world's largest Wall Street derby, Vanguard Group Inc. for the first time won the institutional asset management race by a nose in 2022, beating out BlackRock Inc. for most institutional assets under management worldwide.

Vanguard ended 2022 with $5.02 trillion in institutional assets globally, down 7.1% from $5.41 trillion in 2021, while BlackRock ended 2022 with $4.83 trillion in institutional assets, down 15.1% from $5.69 trillion in 2021. State Street Global Advisors followed at a distant No. 3 with $2.41 trillion and Fidelity Investments at No. 4 with $1.73 trillion.

BlackRock remained the largest firm overall, with $8.59 trillion in total assets globally vs. Vanguard's $7.25 trillion, and has a much larger presence with clients such as government-sponsored retirement plans and sovereign wealth funds.

Vanguard has been on a strong trajectory for years to eventually overtake BlackRock in worldwide institutional assets. And the winner's circle has changed over time. In 2007, Fidelity held the No. 1 spot with $1 trillion in institutional assets globally.

Now, however, BlackRock and Vanguard are "in a league of their own," said Eric Balchunas, a senior analyst with Bloomberg Intelligence, based in Philadelphia. "It's King Kong vs. Godzilla."

BlackRock does more business with asset owner institutions such as sovereign wealth funds and defined benefit funds, he said, while Vanguard draws more U.S. defined contribution retirement plan assets into its passive strategies and mutual funds.

BlackRock's institutional assets grew 24.5% over the past five years, while Vanguard's grew 62%. The rivals will likely continue to each gain market share and trade the top spot for years to come, Mr. Balchunas added.

"They'll be going after one another," he said, "until the government goes after them." Regulators could one day restrict what percentage of a public company that fund complexes can own, although "right now there really isn't anything like that. Even (Vanguard's late founder) John Bogle in his last book said the 1940 Act should be updated to keep a few companies from getting too big," Mr. Balchunas said.

There are two reasons Mr. Balchunas believes Vanguard is outpacing BlackRock: the continued march of passive equity and bond index investing, and last year's bear market.

"Bull markets are good for Vanguard, but bear markets are great," he said. Vanguard investors practice "Navy SEAL discipline, and generally don't sell in downturns," said Mr. Balchunas, author of the book "The Bogle Effect."

Vanguard's passive market index and ETF assets "grow market share at double the rate of their competitors during downturns. They may have taken in less money last year, but everyone else got creamed. So Vanguard's market share grows because there's no more asset appreciation lifting markets."

Passive investing continues to represent a significant piece of each manager's business. Earlier this month, BlackRock won a mandate from the $92.9 billion Oregon Public Employees Retirement Fund, Salem, for up to $1 billion in its BlackRock Russell 3000 index fund.

BlackRock had $5.53 trillion in index assets as of June 30, 2022, compared with $5.26 trillion for Vanguard, according to Pensions & Investments data.

But Vanguard grew faster over the past five years in several areas: Vanguard's passive U.S. equity assets managed for U.S. institutional tax-exempt investors grew 57% since 2017 to $1.33 trillion, while BlackRock assets grew 50% to $976 billion.

Meanwhile, in passive U.S. fixed income for U.S. institutions, Vanguard lost 8.5% in 2022, but grew 57% since 2017 to $333 billion, compared with losses of 22.7% and 19.2% over one and five years, respectively, for BlackRock, to $165.6 billion.

In a statement, a BlackRock spokesman said: "BlackRock's strength in serving institutions globally resulted in more than $192 billion in annual institutional long-term net inflows and more than $4.8 trillion in institutional AUM as of year-end 2022, not including flows into our industry-leading ETFs. We are proud of our history as the largest provider of ETFs, with more than $3 trillion assets under management globally, of which approximately 17% is held by our institutional clients in U.S. ETFs alone. Combining our publicly reported institutional AUM, with the ETFs held by our institutional clients, positions BlackRock as the clear leader serving institutions around the world."

Vanguard has been the largest U.S. institutional tax-exempt manager since 2020, when it surpassed BlackRock, propelled by strong growth in its defined contribution business.

Vanguard U.S. defined contribution plan assets grew by 56% over five years to $1.78 trillion in 2022. Although BlackRock also increased its DC assets to $1.16 trillion in 2022, Vanguard simply grew faster, and cemented its lead: Over the five-year period, Vanguard gained a net $331 billion in U.S. DC assets over BlackRock.

"We've made a number of bold investments in our business," said John James, managing director of Vanguard's institutional investor group, in a statement. "A keystone part of our retirement offer is Vanguard's Target Retirement series. The glidepath is informed by four decades of insights from millions of participants," Mr. James said.

Vanguard's growth in U.S. target-date fund assets over many years illustrates the compounding effect: Those grew to $741 billion in 2022 from $438 billion in 2017; meanwhile, BlackRock's grew over the same five year period to $339.6 billion from $37 billion. Although BlackRock target-date assets grew 20% per year, Vanguard grew 25% a year, and that cemented its lead.

"Vanguard is the safe choice," said Jeffrey DeMaso, editor of the Independent Vanguard Adviser newsletter in New York, in an interview. "If you're a small- or midsized business, picking Vanguard for 401(k) removes any chance of a lawsuit. You can't get fired," Mr. DeMaso said. .

Vanguard's overall business is roughly 95% U.S. client assets, at $6.9 trillion, while BlackRock's is 64% domestic, at $5.4 trillion, said Mr. DeMaso, calling it a "huge distinction."

As the low-cost provider, "it's always easy to up your allocation to Vanguard," said Amanda Tepper, founder of Naples, Fla.-based Chestnut Advisory Group.

The firm's growth in the DC retirement plan market makes sense, given that "DC is the most price-sensitive market segment — by far. It is so price sensitive in fact that there are many asset managers and providers who won't even play in that segment," Ms. Tepper said. "They avoid doing business with DC because of both the rules and liability. That combined with low returns and fees makes it unattractive to some."

Going beyond low-cost retirement plans, Vanguard has nearly doubled its endowment and foundation assets to $115 billion from $63 billion over the past five years.

"They've clearly made inroads," Mr. DeMaso said, while BlackRock's endowment/foundation assets rose to $50 billion from $45 billion.

Still, there are segments where Vanguard doesn't play.

BlackRock managed $569 billion for insurance companies as of Dec. 31, up 12% from the prior year, while Vanguard reported no insurance assets under management in P&I's survey.

Central banks and sovereign wealth funds also turn to BlackRock, clients where Vanguard has little to no business. BlackRock runs $98 billion for sovereign wealth funds, ranking second for all managers, and BlackRock ranks as the top asset manager to central banks, with $73 billion in 2022.

BlackRock also manages liability-driven strategies to the tune of $345 billion, another segment where Vanguard is absent. LDI assets were down only 9% for BlackRock last year, compared with an overall 26.5% drop for the 25 largest LDI managers.

BlackRock's outsourced CIO business had $157.7 billion in assets as of Dec. 31, more than triple Vanguard's $50 billion unit.

Armando Senra, head of Americas institutional at BlackRock, said corporate pension funds continue outsourcing the CIO function because of high costs and personnel turnover. It's also the funded status of corporate pension plans that's "driving clients to derisk, and thus accelerate their ability to reach 'end-game' of fully funded status," he said.

The business segment “OCIO is an area of significant growth for our business in the U.S. and Europe. Funding status at corporate pensions drives them to look to de-risk. There’s also significant turnover in CIOs, and hiring investment professionals and investment technology is expensive and markets are more complex.”

“It’s not only across pensions but also foundations and endowments.” said the New York-based Mr. Senra.

“The trend we’ve seen now is institutions thinking more about risk management and holistic exposures to achieve new objectives like real uncorrelated returns, inflation or downside protection; and therefore, they are expanding their private markets portfolios across areas such as infrastructure and private credit. “Whereas before it was all about maximizing returns, achieved through private equity growth. That’s changing.”

For example, American International Group hired BlackRock in 2022 to conduct select investment services for up to $60 billion of its of its global investment portfolio and up to $90 billion of its life and retirement investment portfolio.

For overall comparison, BlackRock's net long-term flows (excluding cash and advisory) for 2022 totaled $393 billion, including $192 billion net flows into institutional and $220 billion net into ETFs, according to the firm's annual results and Bloomberg data.

Vanguard, meanwhile, reported smaller $151 billion net overall inflows for the year, and its ETF arm registered net inflows of $214 billion into exchange-traded funds, Bloomberg and Vanguard data show.

Vanguard support of ESG waned; it exited the Net Zero Asset Managers alliance in December. The alliance of 300 or so asset managers says it is "committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner, focused on lowering carbon emissions in their portfolios."

BlackRock, on the other hand, runs ESG mandates totaling $586 billion, compared with Vanguard's $9.8 billion in 2022.

BlackRock CEO Larry Fink has also stepped back from endorsing ESG as strongly, mentioning the concept only once in his annual letter this year.

But if investors continue to pick ESG, the inflows will likely continue to contribute to BlackRock's bottom line, while Vanguard was "never really there in the first place," said Andrew Behar, CEO of As You Sow, an Oakland, Calif.-based shareholder advocacy group.

BlackRock lost money from some U.S. red state pension plans, but picked up much more from other markets "because they're making a business calculation in sticking with ESG. I believe they actually believe in being a universal owner, with good risk assessment, doing their fiduciary duty and stating it publicly," he said.

This story has been updated.