TOP MANAGERS ARE GODZILLAS OF THE BIZ: FIRST 5 IN P&I STUDY ALL TOP $200 BILLION IN TAX-EXEMPT U.S. ASSETS UNDER MANAGEMENT

Call it the Godzilla syndrome.

The top 10 in sister publication Pensions & Investments’ annual money manager survey are mammoth, multiproduct companies, and each of the top five reports more than $200 billion in total U.S. tax-exempt assets under management.

Ranked by total U.S. tax-exempt assets — externally and internally managed — the nation’s biggest money manager at the end of last year was State Street Global Advisors of Boston, with $334.4 billion under management. It’s followed by Barclays Global Investors in San Francisco, with $329.7 billion, and Boston’s Fidelity Investments, with $250 billion. Rounding out the top five are two New York outfits, Bankers Trust Co., with $217.9 billion, and the Teachers Insurance and Annuity Association-College Retirement Equities Fund, with $213.4 billion.

INTERNAL AND EXTERNAL

An important change in this year’s rankings is that companies are ranked on assets managed both internally and externally. The change was made to show which firms have been allocated the most assets, as opposed to those that manage the most assets internally.

SSgA and Barclays traded the top ranking based on internally managed U.S. institutional tax-exempt assets. As of Jan. 1, SSgA led that list, with $332.5 billion, compared with Barclays, whose entire $329.7 billion is managed internally. Barclays led last year, by a hair.

Also moving up in the internally managed assets rankings this year were Fidelity and Bankers Trust, which ranked third and fourth, respectively. Both firms increased their institutional business in 1997, pushing ahead of TIAA-CREF, which moved to fifth place from third last year.

In terms of total worldwide assets, Fidelity is the clear leader, with $635 billion under management. In second place was Barclays, with $504 billion, followed by SSgA, $398.7 billion; Prudential Insurance Co. of America, $370 billion; and Vanguard Group Inc., $348.4 billion. Asset totals for SSgA and Vanguard include those passed to subadvisers.

LAG A MYSTERY TO ANALYSTS

Meanwhile, the 100 largest managers of internally managed U.S. institutional tax-exempt assets had $4.548 trillion in U.S. tax-exempt assets under internal management at the end of 1997, compared with $4.444 trillion at the end of 1996.

But had the managers matched the returns of 1997’s hot bull market, the total assets would have grown to $5.38 trillion. Industry analysts cannot explain the lag.

Data for P&I’s survey of money managers are collected as of Jan. 1 each year, based on a survey mailed and distributed via the Web to more than 850 money managers, banks, trust and insurance companies in the United States and abroad. All quantifiable answers are entered into a spreadsheet, from which data for charts and tables are drawn.

Market-adjusted returns were calculated using benchmark portfolios weighted to the average 1997 asset allocations for the Top 100 managers in the survey. Those weightings were: 52.2% for stocks; 28.4% for bonds; 1.2% for real estate; 1.6% for mortgages, 3.8% for mortgage-backed securities; 10.3% for cash; and 2.5% for other.

The Standard & Poor’s 500 stock index returned 33.36% for the year ended Dec. 31; the Salomon Brothers Broad Bond index returned 9.62%; the NCREIF Property index, 13.74%; the Lehman Brothers Mortgage-backed index, 9.48%; and 90-day Treasuries, 9.48%.

The asset mix of the top 100 didn’t change greatly during the 12 months, although stocks rose about 2.5 percentage points.

At the beginning of this year the top 100 firms reported: 54.7% in stocks; 27.4% in bonds; 10.5% in cash; 1.1% for real estate; 1.2% in mortgages; 3.4% in mortgage-backed securities; and 1.7% other.

The asset mix of all 755 managers responding to this year’s survey didn’t vary greatly from the mix reported by 791 managers at the beginning of 1997. The asset allocations as of Jan. 1, 1998, compared with a year earlier were: stocks, 54.8% vs. 52.3%; bonds, 27.7% vs. 27.5%; cash, 9.2% and 9.1%; equity real estate, 2.1% and 2.5%; mortgages, 1.2% and 1.5%; mortgage-backed securities, 3.3% and 3.5%; and other, 1.7% vs. 3.5%.

Like the economy as a whole, the money management business continues to love mergers. A number of the nation’s top firms grew by acquisition in 1997 and more deals are expected as managers scramble to achieve the massive size many think will be needed to flourish in the next century.

Among the most notable deals last year:

* The institutional tax-exempt assets of Chicago-based Northern Trust Co. rose to $150.1 billion after the firm acquired ANB Investment Management and Trust Co., Chicago. With the acquisition, Northern Trust absorbed ANB’s $31 billion in assets under management, of which about $29 billion is indexed.

* The combination of Miller Anderson & Sherrerd and Morgan Stanley Asset Management created an entity with total U.S. tax-exempt assets of $112.2 billion, ranking 10th in total institutional tax-exempt assets.

* Scudder Kemper Investments, the result of Scudder Stevens & Clark Inc.’s merger with Zurich Group last year, ranked 32nd, with about $39 billion in total institutional tax-exempt assets as of Jan. 1. The firm ranked seventh among mutual fund managers, with $98.6 billion in total mutual fund assets.

The global outlook for the institutional asset management business is bright, says Glenna Webster, a principal at Berkshire Capital Corp., a New York investment bank specializing in financial services transactions.

She says there is “a lot of activity in the pipeline. We’re still seeing lots of interest on the buy side in the U.S. business and European institutions looking to acquire asset management firms in the U.S.”

She says changes in European pension systems will expand the opportunities for U.S. firms.

Defined-contribution assets continued to grow, with the most powerful providers — Fidelity and TIAA-CREF — continuing to lead. Fidelity increased such assets by 43%, to $222.1 billion from $155.4 billion a year earlier. TIAA-CREF ranked first in 1997 with $185.3 billion, but didn’t grow as strongly as Fidelity and came in second this year with $213.4 billion.

BULKING UP IN BONDS

Enhanced domestic bond indexing showed the most dramatic increase, with the Top 25 enhanced domestic bond managers handling assets totaling $77.3 billion vs. $54.6 billion a year earlier. When the Salomon Broad Bond index results of 9.62% for the year is applied for a market adjustment, the managers gained 29%.

Passive domestic bond indexing rose 13%, to $99.7 billion from $87.9 billion last year. After accounting for market gains, the assets rose only 3.4%.

Passive domestic indexed equity rose 29%, to $612.3 billion for the 25 largest managers, from $474.3 billion at the end of 1996. Adjusted for the 33.36% gain of the S&P 500, however, passive equity indexed assets declined 3%.

MIXED RESULTS FOR INDEXING

The top 25 enhanced domestic indexed equity managers saw assets increase significantly, because of the inclusion this year of TIAA-CREF. Total enhanced domestic equity indexed assets are $181.3 billion compared with $67.5 billion at the end of 1996. Excluding TIAA-CREF’s $79 billion and adjusting for the market, enhanced indexed assets rose 13%.

Indexed international securities also had a good year in 1997. The 25 largest international indexers reported a total of $122.4 billion in international indexed portfolios, from $95.3 billion last year.

The $121.4 billion reported in international indexed equities rose 26%, after adjusting for the 2.06% return of the Morgan Stanley Capital International Europe Australasia Far East index.

Indexed international bonds did not fare so well. Total assets for the top 25 managers were just more than $1 billion this year, compared with $1.2 billion at the end of 1996. That’s a decline of 11% after accounting for the J.P. Morgan Non-U.S. Government bond index return of -3.77%.

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