BlackRock rules the roost

BlackRock Inc.’s acquisition of Barclays Global Investors last year made it the world’s largest money manager, according to the annual Pensions & Investments/Towers Watson & Co. global 500 ranking.

BlackRock’s $3.35 trillion in assets under management as of Dec. 31 was $1.44 trillion more than second-place State Street Global Advisors, which had $1.91 trillion. In 2008, BGI held first place with $1.52 trillion, $51 billion above second-place Allianz Group.

The BGI deal helped add more than $2 trillion to BlackRock’s assets under management, raising the firm’s assets by 156%, from $1.31 trillion at year-end 2008, when the firm ranked sixth.

SSgA moved to second place last year, with assets climbing 32.4%, while Allianz dropped to third, despite a 27.2% increase in assets to $1.86 trillion.

Fidelity Investments held on to its fourth-place ranking with $1.7 trillion, up 22.3%, and The Vanguard Group Inc. climbed three places to rank fifth with a 31.8% increase to $1.51 trillion.

Total assets managed by the top 500 managers grew 16.1% last year to $61.96 trillion, compared with a decline of 23.1% in 2008. However, last year’s asset total was 11% below 2007’s record $69.42 trillion.

M&A A HELP

As usual, mergers and acquisitions helped boost some managers. In addition to BlackRock, BNP Paribas SA, Bank of America Corp. and Aberdeen Asset Management PLC saw significant swells in assets under management through deal making.

BNP Paribas, which acquired Fortis Group LLC last year, climbed six spots to seventh with $1.33 trillion, while BofA’s purchase of Merrill Lynch & Co. Inc. raised it nine spots to 16th with $750 billion. Aberdeen acquired a portion of Credit Suisse Group AG’s traditional asset management business and leaped 16 spots to 70th with $229 billion.

The past year was “not a bad year for asset classes all around,” said Carl Hess, global head of investments at Towers Watson. “This was a year when the more equity you had in the portfolio, the better your numbers were.”

But inflows into bond strategies, as well as passive and defined-contribution strategies, also raised some managers’ AUM figures. “A lot of investors came out of the global crisis with a more conservative attitude” that drove assets into bond and passive strategies, Mr. Hess said.

Not all bond houses prospered, however.

Total assets at Legg Mason Inc., for example, slipped 2.4% in the year to $682 billion. The company, which remained in 18th place, reported that bond and cash assets made up 75% of total assets under management as of Dec. 31.

And Morgan Stanley Investment Management saw outflows of $39 billion last year, primarily from cash and long-term-bond strategies, according to a company report. (The firm dropped 13 spots in the latest ranking to 43rd after selling off its retail-investment business to Invesco Ltd.; assets fell 15.5% to $381.8 billion.)

The U.S. dollar, whose value declined against many other major currencies last year, also helped boost AUM figures.

Across the 500 managers, the big continued to get bigger: The top 20 managers’ assets rose 21.7% last year to $24.89 trillion and grew at an annual average 7.2% since 1999, versus 5.7% for the entire 500.

BlackRock, which had 75% more assets than State Street, was also by far the fastest-growing manager for the five-year period ended Dec. 31, with a whopping 879.1% increase in assets. BNP Paribas grew 233.1% during that period to take second in asset growth.

Apart from the BGI deal, BlackRock’s assets grew $523 billion last year, an increase of 18.5% — making it No. 1 in asset gains last year just from organic growth. Second was BNP Paribas, which added $517 billion, an increase of 63.8%.

BlackRock benefited from all the major growth themes last year, including equity market appreciation and inflows of more than $150 billion, driven in large part by bond strategies and its ETF powerhouse iShares, said Robert Fairbairn, head of BlackRock’s global client group.

The use of exchange-traded funds is growing steadily among institutional investors, which use them primarily for transition management and to add exposure to more-esoteric markets, he said.

BlackRock is also the largest passive manager, with $1.7 trillion under management.

Other major passive players, such as SSgA and Vanguard, also benefited from the continued trend toward passive last year. Assets at major passive players grew 62%last year and at an annualized average pace of 12.7% in the five-year period ended Dec. 31, according to Towers Watson.

Passive managers said that bumpy stock and bond markets, as well as the broad trend to defined-contribution retirement plans, from defined-benefit plans, will drive further flows to passive strategies.

“ETFs will continue to grow,” said Greg Barton, managing director of Vanguard’s institutional business.

How sticky passive assets will prove to be “is not at all clear,”Mr. Hess said. “Active management is not going away. But it might not dominate people’s portfolios the way it did 10 years ago.”

Active money managers have upped their marketing activity, “making the case for active,” and have expanded distribution channels and client bases to vie for sovereign-wealth-fund and insurance assets, Mr. Hess said.

DC-based passive assets, especially those used in default strategies, likely will stick with passive managers, Mr. Barton said. “Once [participants] are in plans and once they’ve defaulted to [passive strategies], those assets will be very sticky,” he said.

Some passive managers scoffed at the idea that they might prefer assets eventually to flow back into active strategies, where managers can charge higher fees.

“When you are in the passive business, you have to be at scale to create efficiencies that drive attractive returns,” said Scott Powers, president and chief executive of SSgA. “That doesn’t mean it’s [a] low-margin [business].”

Edward Bernard, vice chairman of T. Rowe Price Group Inc., said, however: “I would not say we are indifferent [as to whether inflows are active or passive]. At the end of the day, our primary position in the market is as an active manager.”

T. Rowe added $115 billion, or 41.6%, to its total assets last year, bringing the firm up 13 spots to rank 41st.

The BGI acquisition hasn’t only strengthened BlackRock’s ability to compete in passive strategies, it has also given it greater ability to work with clients on individually tailored, wide-ranging solutions, Mr. Fairbairn said.

Mr. Powers agrees.

“The real challenge that the BlackRock-BGI merger creates is, they are another very strong competitor in providing solutions across the capital structure,” he said.

BlackRock’s alternative-investment offerings also were helped by the BGI acquisition, Mr. Fairbairn said, with assets in such strategies growing to more than $100 billion last year, from about $60 billion in 2008, according to company data.

“It is a little-known fact that we’re one of the largest alternatives managers in the world,” he said.

Such managers were some of the hardest-hit by asset declines last year.

Hedge fund Renaissance Technologies LLC tumbled 121 spots in the rankings, to 480th, after seeing assets drop $4.4 billion, or 42.3%, to $6.05 billion. Assets at Man Investments Inc. fell $9.9 billion to $39.4 billion, a 20.1% decline that knocked the hedge fund 45 spots to 210th.

ING Groep NV’s assets were down $285.3 billion, or 36.7%, to $491.9 billion, dropping the firm 16 spots to 31st, based on the P&I/Towers Watson data, but the company’s real estate business and other minor businesses were excluded from the 2009 total, a spokeswoman said. According to a company report to investors, assets at ING Investment Management increased 9% to $478.4 billion last year.

Managers based in emerging countries ran 4% of total assets in the 500, up from 1.9% in 1997. “There’s a lot of room to expand from there,” Mr. Hess said.

Expansion in emerging markets is the plan at BNP Paribas, which has joint ventures with 16 local managers in developing countries. About 80% of assets run by the bank’s institutional money management unit, BNP Paribas Investment Partners, comes from European clients.

However the acquisition of Fortis Investments greatly expanded the manager’s footprint in the Asia-Pacific region, and the two managers’ Latin American businesses were complementary, said Philippe Marchessaux, chief executive of BNP Paribas’ money management unit.

“We’re quite an old-timer in Latin America, and we continue to develop there, especially in Brazil,” he said.

Meanwhile, Japan-based managers have been in decline since 1997. They ran 6.9% of total assets in the 500 last year, down from 13.2% in 1997.

Mr. Hess said that broadly speaking, assets worldwide are migrating into a barbell pattern, with large, passive managers handling core investments, and specialist boutiques picked to hunt for alpha, resulting in a “bit of a squeeze in the middle.”

But Schroders PLC bucked that trend, along with most of the other trends highlighted in this year’s report.

Assets at the active manager grew $75.6 billion, or 47.7%, to $234 billion. The improvement shot the firm 19 spots up the rankings to 68th.

Drew Carter is a reporter at sister publication Pensions & Investments.