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Assets plummet 21%, worst in 30 years

Date: Tuesday, May 19, 2009
Author: Douglas Appell, PIonline.com

Annual P&I survey also finds market volatility spurs changes in rankings of the nation’s largest managers.

The 500 largest money management firms suffered a 21% plunge last year in worldwide institutional assets — to $21.364 trillion, Pensions & Investments’ annual money manager survey shows.

And in a year where key domestic and international equity indexes plunged between 37% and 43%, the survey showed internally managed U.S. institutional tax-exempt assets dropping 23% to $8.452 trillion.

(Capital Research & Management Co. did not supply data for the latest survey, and the firm’s totals were deducted from the prior year’s numbers for the year-on-year comparisons.)

The unprecedented volatility of capital markets during the year helped scramble the top money manager rankings a bit more than usual, with fixed-income and money market titans gaining ground and firms known for active management and high tracking error retreating.

For example, Federated Investors Inc., a money market heavyweight, jumped to 15th place from 23rd the year before, on the back of a 27% rise in worldwide institutional assets under management to $366.57 billion. Moving in the other direction, AllianceBernstein LP, a leading manager of domestic and international equities suffering through a spate of underperformance, dropped seven spots to 20th place, as its assets plunged 43%.

Giant index managers provided a modicum of stability at the top of the rankings, with State Street Global Advisors and Barclays Global Investors retaining first and second place, respectively.

(For a complete list of articles, infographics and money manager profiles, please go to www.pionline.com/managers.)

SSgA’s worldwide institutional assets dropped 30% to $1.236 trillion in 2008, but in a year that Scott Powers, SSgA’s president and chief executive officer, said was marked by “deleveraging, derisking and flight to safety,” the blow from plunging markets was cushioned by significant global flows into the firm’s index and liquidity strategies.

Boston-based SSgA won “in excess of $100 billion in net new business,” with newer areas of focus, including subadvisory mandates from “asset gatherers,” such as variable annuity sponsors, accounting for a number of significant wins, Mr. Powers said.

For its part, BGI’s worldwide institutional assets fell 27% to $1.149 trillion last year, but it, too, benefited from a resurgence of interest in passive strategies that has continued into 2009, said Bill Chinery, managing director and interim head of BGI’s Americas institutional business. The San Francisco-based firm “took in $50 billion in net new assets” during the first quarter of 2009 alone, he said.

BlackRock Inc., meanwhile, moved to third place from fifth place, with a 16% jump in assets to $1.09 trillion.

Robert Fairbairn, a vice chairman and head of the firm’s account management group in New York, said BlackRock’s experience as a trouble-shooter for distressed portfolios proved a big advantage last year. With the U.S. government and other entities tapping the firm to manage distressed portfolios from financial institutions, BlackRock’s financial market advisory practice took in more than $140 billion in assets during the last quarter of 2008 alone, he said.

In addition, BlackRock’s strength across a wide array of asset classes led a growing number of sizable institutional investors last year — including pension funds and insurance companies — to hire the firm as a fiduciary to oversee their entire portfolios, Mr. Fairbairn said.

In fourth place, BNY Mellon Asset Management’s worldwide institutional assets dropped 16% to $814 billion.

Ronald P. O’Hanley, the New York-based firm’s president and CEO, said his company’s strategy of fielding a portfolio of investment boutiques spanning all major asset classes cushioned the market’s blows in 2008.

Some suffer, some gain

While some subsidiaries suffered from what Mr. O’Hanley called the year’s unprecedented “move away from risk assets to non-risk assets,” others — including BNY Mellon Cash Investment Strategies, the group’s $400 billion liquidity arm; Standish Mellon Asset Management Co., its fixed-income and debt workout unit; and Pareto LLC, its currency management affiliate — gained, he said.

Falling to fifth place from third place, Fidelity Investments saw its worldwide institutional assets drop 27% to $763 billion.

Despite the negative environment from last year’s “repricing in capital markets,” Scott David, president of retirement services for Fidelity, said “we actually felt very good about 2008” — a record year in terms of new clients coming to Fidelity, while existing clients stayed the course and key products, including Fidelity’s target-date-retirement Freedom Funds, continued to garner inflows, he said.

Climbing two spots to sixth place, JPMorgan Asset Management’s assets rose 6.9% from the year before to $715 billion. John Hunt, CEO of institutional business in the Americas, said the New York-based company’s focus on a range of asset classes allowed the firm to buck the market’s downtrend last year.

JPMorgan was able to garner positive net flows of $118 billion in 2008, with “significant inflows” for cash strategies, and positive flows for private equity, hedge funds of funds, U.S. equities and 130/30 strategies as well. Those net flows more than offset roughly $70 billion in market declines, he said.

Pacific Investment Management Co.’s worldwide institutional assets rose 1% to $617 billion, enough to propel the bond manager to seventh place, up four notches from the year before.

Jonathan Short, a managing director and PIMCO’s head of U.S. institutional business development, said the same “defensive posture” that hurt PIMCO heading into the latter part of 2007 proved “prescient” in 2008, helping the firm deliver attractive returns for investors.

With high-tracking-error managers such as Western Asset Management and Legg Mason Capital Management suffering through one of the toughest years on record for active managers, Legg Mason Inc. dropped to eighth place from fifth. The firm’s worldwide institutional assets fell 25% to $605 billion.

David R. Odenath, head of the Americas, said some of Legg’s affiliates — such as quant manager Batterymarch Financial Management, Boston — garnered attention as investors “hunkered down on risk and duration” last year. Others, he said, will see a pickup when the market’s appetite for risk returns.

Rounding out the top 10, two more heavyweights best known for index strategies retained their rankings from the year before. In ninth place, Vanguard Group’s worldwide institutional assets dropped 12% from the year before to $581 billion, while Northern Trust Global Investments’ assets dropped 26% to $464 billion.

In a year with so much market drama, it’s not surprising to see an unusual amount of change in the pecking order for money management’s “800-pound gorillas,” but another part of the story is how the plunge in asset levels last year has affected the competitive position of these companies, said Kevin Quirk, a partner with Darien, Conn.-based money manager consultant Casey Quirk & Associates LLC. He declined to discuss the situations of specific firms.

Money management executives said they’re confident their firms are well placed to thrive during the coming year. For example, Legg’s Mr. Odenath, noted signs that investors’ appetite for risk is beginning to re-emerge, a trend that would favor managers such as Western and Legg Mason Capital Management, which have stuck to their investment disciplines.

Industry in flux

But those executives concede the industry will be in flux in 2009, and firms will have to position themselves strategically for a future that is unusually murky.

“Things aren’t going to just revert” to the way they were before, and PIMCO is working now to figure out its strategy for the “new normal” — which will likely be a slower-growth environment than the one investors are used to, said Mr. Short.

“We’re not just going back to the same old, same old,” agreed BNY Mellon’s Mr. O’Hanley. After the setbacks of 2008, pension executives will be rethinking traditional asset allocation — for example, paying more attention to how they approach liquidity needs for people covered by their plans who are already retired and those who are still working, he said.

Among other findings of the year-end 2008 survey:

•The steep drop in equities markets during 2008 had its impact on the aggregate asset mix of the largest 500 managers, with equities dropping 12.3 percentage points to 40.5%. Bonds rose 7.9 points to 35.2%; cash was up 2.1 points, to 13.4%; real estate equity bumped up to 4.9% from 4% and other grew to 6% from 4.6%. Among the largest 100 managers, the changes were even more marked: Equities fell 12.8 points to 39.5%; bonds rose 8.4 points, to 36.3%: cash was 15%, up from 12.5%; real estate, 3.3%, up from 2.8%; and other, 5.9%, compared with 4.5%.

•The international assets reported by the managers reflect the hammering international markets took during 2008. Equities are down 47% to $975.95 billion and bonds fell 17% to $157.18 billion.

•Among managers reporting defined contribution assets, overall assets fell 23% to $2.55 trillion and internally managed assets fell 21%, to $2.26 trillion. Stable value assets reflected participants’ search for safety, rising 6.2%, to $413.9 billion.

•Defined benefit assets managed internally fell 28% to $3.196 trillion, while endowment and foundation assets fell 33%, to $428.8 billion.

•The number of portfolio managers and research analysts employed also fell during the year, to 12,744 and 12,110, drops of 2.2% and 2.5%, respectively