Institutional managers continue growth spurt

Despite a second consecutive year of solid growth, the group's combined $11.42 trillion in assets under management remained $1 trillion short of the pre-crisis high, reached at the end of 2007. Even so, money management executives said a growing appetite for risk, powered by attractive gains for key market segments, made 2010 a good year for managers of institutional assets. For the year, the broad Russell 3000 U.S. equity benchmark jumped 16.9%, the Morgan Stanley Capital International All Country World ex U.S. Investible Market Index added 9.4% and the Barclays Capital U.S. Aggregate Bond Index rose 6.54%.

BLACKROCK ON TOP

Among managers, BlackRock Inc. grabbed the top spot in the latest rankings with $929.4 billion in U.S. institutional tax-exempt assets, up 6% from the year before. BlackRock traded places with State Street Global Advisors, which was down 4.4% to $848.1 billion. Robert Fairbairn, senior managing director and head of BlackRock's global-client group, said 2010 was the year BlackRock put a challenging integration “behind us.” As the firm continued to meet the needs of clients who are putting greater emphasis on risk management, that focus found BlackRock enjoying an uptick in demand in areas such as liability-driven investments, multiasset-class solutions, fiduciary outsourcing and both the passive and alternatives sides of “barbell” approaches to asset allocation, he said. Executives at top 10 firms called the year a strong one, even if outflows from safe-haven segments and wind-downs of assets the government was left holding during the crisis depressed AUM gains for some of the largest. In fact, the $5.09 trillion in combined AUM for the 10 biggest managers was up only 5.6% from the year before, or roughly half the gain for the top 500 — even as a number of observers predicted that growing client demand for partnerships with managers would increasingly favor bigger firms. The same 10 firms dominated the rankings in both 2009 and 2010, with two additional shifts for the latest survey: TIAA-CREF, with an 8.6% gain to $404.3 billion, took sixth place from BNY Mellon Asset Management, which slipped to seventh after a 4.8% rise to $394.8 billion, and Pacific Investment Management Co. LLC moved up a notch to eighth with a 14.2% gain to $367.6 billion, swapping places with Legg Mason Inc., which reported a 4.9% drop in AUM to $347.5 billion. Money managers across the board said the move away from safe-haven assets left them sporting a more attractive mix of assets as 2010 drew to a close. For the year, fixed income's share of the top 500 managers' assets saw the biggest jump, up 1.5 percentage points to 35.1%, followed by stocks, which rose 0.6 points to 46.1%. Cash, meanwhile, tumbled 1.2 points to 9.3%. Mitchell Harris, president of investment management with BNY Mellon Asset Management, called 2010 “a terrific year” for his company, even if outflows from cash products left growth for the group's institutional tax-exempt assets at a seemingly modest 4.8%. By contrast, BNY Mellon Asset Management's equity and fixed-income AUM jumped by more than 12% and 11%, respectively, reflecting a pickup in allocations to higher-risk strategies, he said. Those strategies include global and emerging-markets debt and equities, opportunistic bonds and absolute return. As clients moved to “re-risk,” SSgA saw outflows from cash and other areas buoyed by safe-haven flows during the crisis offset by inflows for higher-margin strategies, including funds of hedge funds, credit and alternative-beta offerings. SSgA also experienced a near 25% growth in exchange-traded-fund assets, roughly half of which are institutional, noted Scott F. Powers, the firm's president and chief executive. Outflows from one very large “strategic client relationship,” which Mr. Powers declined to identify, resulted in a drop of 4% in the firm's AUM from the year before, but on balance, a more attractive product mix made 2010 “a pretty good year” for SSgA, he said.

ACTIVE STRATEGIES LAG

If riskier assets were the belles of the ball for the latest year, actively managed domestic equities were the wallflowers. The top 500 managers reported $1.778 trillion of active domestic equity AUM, up 11.8% but well short of the Russell 3000's 16.93% advance for the year. Some of that gap in active U.S. equity AUM reflected a continued shift by investors to passive equities, but a much bigger chunk went elsewhere, including into alternatives and global equity, said Terry A. Dennison, U.S. director of consulting for Mercer LLC's investment consulting business. Among alternatives, the latest survey showed assets in hedge fund strategies up 34% for the year to $109.9 billion, with commodities sporting the strongest gain, up 91% to $29.08 billion. Global equity, meanwhile, surged 40% to $254.1 billion, while passive domestic equity rose 17% to $1.18 trillion and international equity advanced a modest 8% to $1.312 trillion. Mr. Dennison said the jump in global equity AUM might well reflect the push in recent years by Mercer and other investment consultants to give active managers greater scope to use “all the different levers” at their disposal — selecting countries, sectors, regions and currencies, in addition to individual securities. The continued abandonment of home country bias in favor of global-equity mandates — which allow investors to be a bit more tactical or opportunistic — was a “huge theme” in 2010, said Young Chin, chief investment officer for Pyramis Global Advisors, the institutional arm of Fidelity Investments. Fidelity kept third place in the latest survey, with a 12.1% gain to $592 billion. The main destinations for money flowing out of domestic equity were different for public- and private-pension funds, said Dev Clifford, a managing director with institutional strategic-consulting firm Greenwich Associates. Beyond alternatives, which both favored, public funds were more focused on higher-alpha strategies, including global equities, while corporate-pension funds — in an effort to better match their assets and liabilities — were allocating more money to fixed income, he said. P&I's latest survey showed allocations to active U.S. bonds rising 7.3% to $2.49 trillion — compared with the 6.54% gain for the broader Barclays Capital U.S. Aggregate Bond Index. International bonds, meanwhile, saw even stronger growth, up 31% to $233.9 billion. Charles Lowrey, chief operating officer for Prudential Financial Inc.'s U.S. businesses, attributed the growth of his group's institutional tax-exempt AUM in 2010 — 17.1%, the second-highest among the top 10 — to extremely strong growth in Prudential's fixed-income assets in recent years. “We're seeing tremendous fixed-income flows [to] a whole variety of strategies” as investors both push ahead with liability-driven investing strategies and move into spread products amid concerns about U.S. Treasuries, he said. Almost all of Prudential's record $18.7 billion in U.S. tax-exempt institutional flows last year were for fixed-income products, Mr. Lowrey said. Those inflows helped Prudential maintain its 10th-place position, with $290 billion in assets.

FIXED-INCOME SHIFT

Meanwhile, the move toward less constrained global mandates was mirrored on the fixed-income side. Investors continued to shift to global multisector strategies from broad U.S. market portfolios benchmarked to the Barclays Aggregate, relying on their managers to “take advantage of opportunities around the globe,” said James J. Flick, head of global client service and marketing with Western Asset Management Co. The move to more-specialized assignments — such as the $2 billion Treasury inflation-protected securities mandate Western was awarded recently — has improved the firm's business mix, even though money has flowed out of lower-margin products, he said. (Mr. Flick didn't name the client.) Industry-leading defined-contribution flows for The Vanguard Group Inc.'s index-based target date funds and demand for long-dated bonds from executives of liability-driven-investment-focused defined-benefit plans helped Vanguard post a 20% gain in U.S. institutional tax-exempt assets to $455.9 billion last year, said Gerard P. Mullane, head of the firm's institutional investor group. That increase, the strongest among the top 10 firms, helped Vanguard retain fifth place. While Vanguard's DB business, at $26 billion, accounts for less than 10% of the firm's AUM, it enjoyed growth of close to 25% last year, Mr. Mullane said. But demand for the firm's target date funds, as well as moves by DC plan executives to add an indexed tier of offerings, remain the main drivers of Vanguard's growth, he said. Douglas Appell is a reporter for sister publication Pensions & Investments.