Big money management firms add assets as markets rebound

Total assets under management of the largest 500 money managers in the world edged 4.4% higher in 2010, to $64.7 trillion, according to the annual Pensions & Investments/Towers Watson World 500 ranking.

The growth was fueled by recovering global markets, accelerated moves to diversify investment risks and currency movements. “There was a lot more optimism in 2010 compared to the two years prior to that,” said Craig Baker, global head of manager research at Towers Watson & Co.

In 2008, global assets under management for the top 500 managers plummeted 23.1%; they began to recover the following year, gaining 16.1%. However, total AUM is still below the high mark of $69.4 trillion achieved in 2007, a level that’s unlikely to be surpassed by the end of 2011 if current market volatility persists, sources said.

One of the biggest threats to the global economy this year is the eurozone crisis, which is likely to dampen asset growth for 2011. Because the issues largely depend on a political resolution, there’s no clear way of assessing the depth of the problems based solely on economic and valuation factors, Mr. Baker said.

“It’s very policy-driven, and knowing whether politicians have the political will to do what needs to be done is very difficult,” he said. “2011 is looking very different from 2010, when managers generally felt like they were getting back into pretty good shape.”

Robert Fairbairn, senior managing director and head of the global client group at BlackRock Inc., the world’s largest manager in the 2010 ranking, added: “In 2011, we saw the political challenges that had already emerged in the background in 2010 actually come to the foreground.”

The top five managers were unchanged in 2010 from the previous year, but the distance between the top two managers grew. BlackRock, the largest manager, had $3.56 trillion in assets, while No. 2 State Street Global Advisors reported $2.01 trillion, a difference of $1.55 trillion. In 2009, that gap was $1.44 trillion.

A HAND FROM PIMCO

Pacific Investment Management Co. LLC, which tallied a 24% increase for the year, according to separate data reported by the firm, helped its parent Allianz Group maintain its third-place position, with a total of $2 trillion in AUM, an 8.1% increase.

Fidelity Investments gained 6.6% to remain in fourth place, with $1.81 trillion. Nipping at its heels is The Vanguard Group Inc., which grew by 17% in 2010, with $1.76 trillion in assets.

BlackRock’s exchange-traded-fund business, iShares, was a key growth engine in 2010, accounting for about $590 billion in AUM, according to BlackRock data.

“Clients want to have transparent, cost-effective access to markets in a very liquid way,” Mr. Fairbairn said. Other areas of the business highlighted by Mr. Fairbairn include alternatives, which accounted for $109 billion in AUM at the the end of 2010, and BlackRock Solutions, the risk analytics platform, with about $10 trillion in assets.

In addition “our solutions-orientated strategy, which is the blending of alpha/beta strategies and includes [liability-driven investing], has grown every year and for the past six consecutive quarters,” Mr. Fairbairn said.

Although institutions still dominate BlackRock’s clientele, accounting for about 70% of the total AUM, the firm’s retail business is growing, Mr. Fairbairn said. “One of the areas in which we hope to build our market share is in the U.S. retail market,” he said.

Among the top 10, the only major move was by Deutsche Bank AG, which climbed over Axa Group and BNP Paribas SA to No. 6. Deutsche Bank’s AUM grew 24% to $1.56 trillion, partly due to the company’s acquisition of Sal. Oppenheim Group, which added about $200 billion.

Deutsche Bank’s asset management division, Deutsche Asset Management, completed a major re- organization last year that began in 2005, said Kevin Parker, the unit’s global head. Several key areas were targeted, including fixed income, alternatives and multiasset-management outsourcing, at the expense of long-only active equity.

For global managers overall, equities were a key driver of 2010’s growth, while currency movements helped to steer asset expansion in certain countries.

In relation to the U.S. dollar, “managers with significant emerging-markets books and clearly anyone with more [assets invested] in the U.S. and Japan would have done well,” Mr. Baker said.

For example, global and emerging-markets specialist Franklin Templeton Investments rose five slots to No. 19, with $671 billion in assets in 2010, a 21% gain. The increase came largely from investors’ shifting into global bonds, global equities and emerging-markets bonds and equities, said Vijay Advani, executive vice president of global advisory services.

“We definitely benefited after the 2008-09 crisis as investors continued to diversify into global and emerging markets,” Mr. Advani said. “In the early “90s, [investors] had maybe a 5% allocation to emerging markets [as a portion of the equity portfolio]. Today it’s between 10% and 20%. This is a long-term march.”

In 2010, the MSCI All Country World Index — which includes developed and emerging markets — returned 10.4%, while the MSCI World Index, which comprises developed economies globally, returned 9.5%. In the U.S., the Russell 3000 Index rose 14.7%, and the Barclays Capital Global Aggregate Total Return index increased 5.54%.

Extending the lead for managers of U.S. assets is the dollar, which appreciated about 8% against the euro and 3% against the British pound in 2010. Firms with significant holdings in Japan also benefited from currency movements — the yen was up 13% versus the dollar for the year and a whopping 22% against the euro.

The strengthening dollar helped North American managers turn a corner, pushing the percentage of assets run by managers based in the continent over the 50% mark, to 51.8%, for the first time in at least a decade. Assets of North American managers totaled $33.5 trillion in 2010, an increase of 9.7% over the previous year. Assets of managers domiciled in Japan increased 7% to $4.6 trillion during the same period. European managers’ share of the total assets among the top 500 managers declined by 4.7% to $22.9 trillion.

Among the top 20, U.S. managers accounted for 60.1% of the total assets for that group, while the remainder largely belonged to European and Japanese managers. Overall, the top 20 managers’ share of the total assets slightly increased to 40.7%, from 40.2% during 2010. Managers ranked No. 21 through No. 50 controlled 22.5% of the total assets in 2010, compared with 21.5% the previous year. As a result, the share of assets for smaller managers below that shrank as a group to 36.8% in 2010, from 38.3%.

In the past five years, the fastest-growing manager among the top 50 was Great-West Life & Annuity Insurance Co., which rose to No. 49 in 2010, from No. 92 in 2005. BlackRock catapulted into first place, from No. 32 in 2005, mainly due to the acquisitions of Merrill Lynch Investment Management in 2006 and Barclays Global Investors in 2009.

Others climbing the ranks through acquisitions include BNP Paribas, which rose to No. 8, with $1.31 trillion in assets in 2010, from No. 29, with $468.4 billion in 2005. Affiliated Managers Group Inc., which was No. 50 in 2010, with $320 million, was No. 80, with $184 billion, five years ago. In 2010 alone, its assets grew 53.8%, mainly due to four acquisitions of boutique managers.

Passive management also has helped some firms expand assets. For example, Vanguard climbed to No. 5, with $1.77 trillion, in 2010, up from No. 10, with $957.5 billion, in 2005. Legal & General Group PLC became the 29th-largest manager in 2010, with $564.6 billion, up from No. 43, with $350.7 billion, five years earlier. Legal & General also benefited from pension funds’ shifts into fixed-income and liability-driven investments.

“Clearly, what’s been happening in the broader market has helped our position,” said Mike Craston, managing director of LGIM’s institutional business. “Our core businesses are built around [liability-driven investments], passive strategies and fixed-income capabilities. In all of those areas, market trends have been strong.” At LGIM, about 80% of the AUM is managed for external clients in 2010, compared with 70% about five years ago, according to Mr. Craston.

Some trends appear to have cooled off in 2010, according to P&I/Towers Watson data. For example, passive management grew 8.7%, while assets of all 500 managers rose 4.4%; in the previous year, passive assets grew 62%, versus 16% in overall assets.

“There has been so much growth in passive during the past decade [that] a lot of investors … now are focusing more on their active portfolios,” Mr. Baker said. The number of active equity mandates rose by 30% in 2010, while fixed-income searches fell by 30%, compared with 2009.

“However, part of the reason why fixed-income selections fell in 2010 was because they had been very high in 2009, indeed up by between 40% and 50%, compared with 2008,” Mr. Baker said. “Most clients found good reason to further diversify into alternatives in the 2010 market environment.”

In 2010, the number of searches for hedge fund strategies — primarily direct rather than funds of funds — increased by 50%, compared with the previous year. Alternative selections in asset categories such as private equity and real estate also rose about 40%, according to data from Towers Watson.

“The future of asset management is extremely bright,” despite the recent market turmoil, Mr. Parker said. “There’s unprecedented wealth creation in the world, and wealth needs to be managed.”

Thao Hua is a reporter for sister publication Pensions & Investments. P&I’s data editor, Timothy Pollard, contributed to this story.