The past 24 months have been a wild ride for the asset management industry. It went from the depths of despair during the fourth quarter of 2008, when the global economy teetered on the brink of disaster, to the heights of elation during the last nine months of 2009, as markets around the world came roaring back. This year, of course, has been marked by renewed volatility, whether from sovereign debt troubles in Greece and other European nations, a fall in the value of the euro, fears of inflation as government spending has exploded, stalled economic recoveries around the globe or the BP oil spill in the Gulf of Mexico, the worst in America’s history.
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“People are walking on egg shells again,” says Scott Powers, president and CEO of Boston-based State Street Global Advisors.
With $1.9 trillion in assets, SSgA is the second-largest firm in the II300, Institutional Investor’s annual ranking of the 300 biggest U.S. money managers. Asset management firms of all sizes are increasingly coming to terms with just how fragile their business models may be, even as asset-based fees have long been touted as almost bulletproof, delivering money in good economic times and bad. BlackRock’s $15.2 billion purchase of Barclays Global Investors from Barclays last year — which created the largest asset manager in the world, a $3.3 trillion behemoth that tops the II300 — has given a boost to mergers and acquisitions activity. Like Barclays, Morgan Stanley (No. 22, with $354 billion) decided to divest what it saw as a noncore business, selling Van Kampen Investments to No. 18 Invesco ($423 billion in assets) in June.
At the same time the founders of smaller shops are getting realistic about a fair price they can get for their firms, letting go of the idea that another fevered bull market will emerge and create bidding wars for their businesses.
One example of a deal that likely would have fetched a much higher price in flusher times is Minneapolis-based Piper Jaffray Cos.’ recent acquisition of Advisory Research for approximately eight times ebitda (earnings before interest, taxes, depreciation and amortization). Steven Levitt, co-founder and managing director of investment bank Park Sutton Advisors in New York, says that Chicago-based Advisory Research, which has approximately $5.9 billion in assets and focuses on value investing, would have sold for about 11 times ebitda during the 2003–’07 time period.
The biggest winners in 2009 were firms that offer fixed-income products, as well as international and global strategies. Big gainers include SSgA, whose assets have grown by $467 billion since the end of 2008; Vanguard Group, which climbs two spots, to No. 5, and now has $1.2 trillion in assets; Allianz Global Investors of America, the owner of bond giant Pacific Investment Management Co., which rises two spots, to No. 7, with $1.1 trillion in assets; and Franklin Templeton Investments, which jumps from No. 19 to No. 15, with $554 billion.
Populism also won out in 2009. Vanguard, which has been gaining market share among the retail and institutional crowds, has benefited because investors perceive that its unique structure — the firm is owned by its shareholders — puts it on their side, not Wall Street’s. In 2009, Vanguard had its second-highest net cash inflow ever, taking in $78 billion in bond funds, $44 billion in equity and $2 billion in balanced funds.
The II300 had its share of losers in 2009, including No. 11 Legg Mason, which saw its assets fall $17 billion, to $681 billion, as a result of problems at its Western Asset Management Co. unit and several years of underperformance by value manager Bill Miller, whose 15-year record of beating the Standard & Poor’s 500 index came to a halt in 2006. Although Miller returned to form in 2009, trouncing the S&P 500 by 14 percentage points, investors continued to depart his value funds. Legg Mason was also hit by equity outflows at its other affiliates.
The big story in 2009 was all about bond funds. Flows into fixed income hit record levels last year, despite the double-digit returns that most equity funds enjoyed. Investors have become increasingly risk-averse after having suffered almost 40 percent losses in their equity portfolios in 2008.
“After the dramatic rally in equity markets, investors caught on the sidelines were asking whether the world really had changed and whether they should jump in,” says SSgA CEO Powers. “Many said, ‘No.’”
Missing out on possible gains in the equity market seemed a reasonable trade-off for the big cushion that bonds can provide. Investors sent $376 billion to bond funds in 2009, while they pulled $11 billion from equity funds, according to the Investment Company Institute. The trend has continued into 2010. Through April investors poured a further $119 billion into bond funds and only $41 billion into equity funds.
Aging baby boomers are also behind the fixed-income frenzy. About 22 percent of Americans, some 68 million people, will reach retirement age by 2020, and as baby boomers start drawing down their assets, they can’t risk wild fluctuations that often accompany equity investments.
“Demographics is the megatrend that all asset managers are facing,” says Joseph Amato, president of Neuberger Berman, No. 35, with $173 billion in assets.
Investors’ attraction to bonds has been a boon for smaller fixed-income players, as well as for the giants. Over the past few decades, fixed income has been controlled by a virtual oligopoly: BlackRock, Pimco and Wamco. Performance problems at Wamco and other issues have prompted investors to think hard about diversifying their assets away from such a small cadre of firms. Among the winners have been Payden & Rygel Investment Management and Eaton Vance Corp.
“Larger firms are unable and unwilling to customize products,” says James Sarni, managing principal and a senior portfolio manager of $50 billion Payden & Rygel (No. 81) in Los Angeles. “Investors get something off the shelf. When you run trillion-dollar firms, you have to be thinking scale and efficiency.”
Investors have finally bought into the argument that they should diversify away from their home countries and buy more international equities. Asset managers with global capabilities, such as giant Franklin Templeton, saw huge inflows in 2009. Investors pulled $39 billion out of domestic equity funds but stashed $30 billion in foreign equity in 2009.
Emerging markets have been the darlings of international investing, as financial institutions there stood tall next to those in swooning developed nations that had gorged on mortgage debt and held sketchy investments on their balance sheets. Not surprisingly, asset managers are quickly expanding into emerging markets, both to manage securities there for global portfolios and to offer financial services to the growing middle classes in places like China and India.
PineBridge Investments (No. 54, with $87 billion), the former investment arm of American International Group that was spun off as an independent money manager earlier this year, said it will strive to become a major retail player in Asia, leaving the hypercompetitive U.S. market for individual investors to long established players like Fidelity Investments (No. 3, with $1.4 trillion).
“It’s no secret that there is competition in countries like India and China,” says Hans Danielsson, head of fixed income and listed equities at PineBridge. “But when we look at the growth in savings, the growth in economies and the increasing sophistication in these markets, we see great opportunities.”
