Global Investment Review

Global Investment Review

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America the beautiful

Just in case you hadn’t noticed, the 1990s were fantastic years for the US economy in general and for its investment markets in particular. One of the knock-on effects to this has been that the asset management industry, along with many others globally, has become increasingly Americanised.

Every year Watson Wyatt, in conjunction with the respected US industry magazine Pensions & Investments, compiles a ranking of the 500 largest money managers around the world by assets under management. With four years’ worth of history we look back at a period characterised by strong asset growth and intense M&A activity.

The big get bigger

Total assets managed by the top 500 money managers have grown at 14% per annum over the past four years, to reach a massive US$33.6 trillion by the end of 1999. At an annual growth rate of 23% the top 20 managers have outpaced the rest by far, while the middle segments (20th to 250th rank) have grown at a more moderate 12-18%p.a. Assets under management controlled by the bottom 250 managers have grown a mere 2% per annum. While this may reflect slow growth in some firms, it may also be an effect of the increasing concentration among the larger institutions, with new, smaller institutions constantly entering the ranking as other institutions move on up. In 1999, well over 30 names disappeared in the ranking due to M&A activity.

Growth patterns have varied dramatically across the segments during the period, as illustrated by Chart 1. While the top 20 managers recorded a staggering 29% asset growth in 1998, the lower half of the top 500 actually recorded a 4% fall in assets in the very same year. In 1999, there was more of a convergence in growth rates but the top 20 still grew nearly three times faster than the bottom 250.

Massive increase in concentration

One consequence of these growth patterns has been an increasing concentration at the top. At the end of 1996, the top 20 managers controlled 28% of the surveyed assets; by the end of 1999 this had risen to 34%. In 1999, the average top 20 manager had 65 times as many assets under management as the average manager in the bottom 250 segment; in 1996 this ratio was 44.

M&A accentuates concentration

Asset growth among the largest 20 managers averaged 23% per annum during the period 1996-1999, peaking at 29% in 1998. Symptomatic of the furious M&A activity witnessed over the past years, this growth has, to a considerable degree, been driven by consolidation among the largest money managers. Prominent examples in recent years include the SBC/UBS and Deutsche Bank/Bankers Trust deals. In fact, if it had not been for the SBC/UBS deal in 1998, growth in the top 20 would have come in at 25% instead of 29%, something that amply demonstrates the impact on industry concentration due to these mega-mergers. Equally, the 1999 acquisition of Bankers Trust by Deutsche Bank added nearly US$300 billion to the top 20 and contributed almost one fifth to the total 17% growth in assets, disregarding any additional effects of a strengthening US dollar during 1999.

US managers dominate at the top but Europeans also gain ground

Historically, US managers have dominated the survey and there is no sign of this trend reversing. After years of booming domestic markets and a strengthening US dollar, US firms are soaring through the ranking in most segments. Indeed as shown in chart 2, the US is home to many asset managers who have rapidly come to dominate the top 250-500 segment once their larger counterparts have merged.

At the end of 1996, 218 (44%) out of the top 500 managers were US-based institutions, a figure that has risen to 240 (48%) by the end of 1999. In asset terms, US firms in the top 20 were even more successful: with an annual asset growth of 48%, US controlled assets in the top 20 have grown from 29% to 53% over the period.

While essentially the same five European managers have held positions in the top 20 throughout the period, there has been growth in the top 21-50 segment. AEGON of the Netherlands and Italian Generali are examples of institutions that have scaled the rankings and increased the share of European institutions in this segment from 20% to 30%.

The success among US and European managers of course takes place against the backdrop of a continuing decline of Japanese institutions. In 1996, Kampo was one out of seven Japanese institutions in the top 20 but by 1999 Kampo was the only one left.

It is highly likely that the strength of the US dollar during the period has flattered US-based managers. Nevertheless, the decline of Japanese assets continued despite a strengthening yen more recently, while European managers experienced steady asset growth during a period when most European currencies recorded substantial weakening relative to the US dollar.

Decline of the independent?

With so much M&A activity going on and so many independent asset management firms being targeted by larger financial groups, one would perhaps expect to see fewer and fewer independent firms in the rankings. An analysis of the top 20, however, tells a different story, with more than twice as many independent managers as four years ago. Fast-growing US independents such as Vanguard and Amvescap have made their way to the top to join the ranks of giants such as Fidelity and Capital.

Passive heights

With an ever-increasing interest in passive management globally, it is hardly surprising that the leading firms in this field have done well. The most eye-catching passive success story is that of US-based Vanguard, which nearly quadrupled assets under management over the four years to 1999 from US$156 billion to US$564 billion. This has meant a leap from position 43 to eight in four years, purely through organic growth. Meanwhile, giants such as Barclays Global Investors of the UK and US-based State Street Global Advisors have remained within the top 10 throughout the past four years, maintaining high levels of organic asset growth at 27% and 31% per annum respectively. Some way down the list, Legal & General of the UK, most widely known as a passive manager, has doubled its assets during the period.