Managers look back with nostalgia at 2021

It’s not too early for money managers to look back with nostalgia on the solid gains they enjoyed in 2021, after inflationary pressures not seen for decades emerged this year to end an era where equity managers have been able to think of the U.S. Federal Reserve as a friend.

Pensions & Investments’ latest annual survey of the largest money managers found worldwide institutional assets overseen by roughly 450 managers around the globe rising 6.3% last year to $59.38 trillion, and 50.5% over the five years through Dec. 31.

U.S. institutional tax-exempt assets managed internally, meanwhile, jumped 11.2% for the year to $20.06 trillion, lifting the gain for the past five years to 46%.

For money managers around the world, the latest year was “really bullish,” driven by hopes for a continued recovery from COVID-19 lockdowns, said Fabrice Chemouny, Hong Kong-based head of Asia-Pacific at Natixis Investment Managers.

It was essentially equity-driven, with the flood of liquidity central banks unleashed to combat the COVID-19 crisis from early 2020 crushing sovereign bond yields and making the acronym TINA — “there is no alternative” to equities — part of the vernacular, Mr. Chemouny said. For money managers last year, “all the planets were aligned,” he said.

But then the universe tended to disorder.

Russia’s invasion of Ukraine in February and unanticipated COVID-related lockdowns in China have combined this year to exacerbate already surging inflation in the U.S., undermining a “buy-the-dip” mentality among institutional investors that had become almost reflexive in recent years, said Amin Rajan, CEO of CREATE-Research, a London-based consulting firm for the global money management industry.

The U.S. consumer price index for April posted a 12-month increase of 8.3%, almost double the 4.2% increase for April 2021, which was at that time the highest level since 2008. Against that inflationary backdrop, the S&P 500 total return index retreated roughly 13% over the first five months of 2022, after surging almost 29% in 2021.

Now, “the Fed has turned very hawkish” and either an anticipated rate hike cycle or the war in Europe could prove to be game changers for investors this year, with recession or even stagflation on the table, Mr. Rajan said.

For 2021, before the tailwinds supporting managers abruptly shifted to headwinds, the rankings of the biggest managers by total worldwide assets held steady, with the top five reporting gains in assets under management of between 14% and 20%.

BlackRock Inc. retained pride of place as the world’s biggest manager, with $10.01 trillion in assets under management, up 15.4% from the year before, followed by Vanguard Group Inc., up 18.4% at $8.47 trillion and Fidelity Investments, with a 17.3% gain to $4.24 trillion.

State Street Global Advisors remained in fourth place with $4.14 trillion, up 19.3% from the year before, with fifth-place Capital Group Cos. Inc. up 13.9% to $2.72 trillion.

Worldwide institutional AUM rankings saw BlackRock still on top, but the gap with Vanguard narrowing. BlackRock had $5.69 trillion in worldwide institutional AUM, up 10.6% for the year, compared with a 13.6% gain for Vanguard to $5.41 trillion. They were followed by SSGA in third with $2.91 trillion, up 15.4%.

Fidelity, which ranked fifth in 2020, climbed to fourth place with a 16.3% gain to $2.03 trillion, trading places with BNY Mellon Investment Management, which dropped to fifth place with a 9.5% gain to $1.95 trillion.

For the year, passive U.S. equity AUM, managed internally on behalf of U.S. institutional tax-exempt investors, rose 13.1% to $3.87 trillion, almost double the 6.9% increase in actively managed U.S. equity AUM strategies to $3.11 trillion.

With rock-bottom yields persisting through the start of 2022, fixed-income AUM totals posted relatively incremental increases, with a 2.5% gain for actively managed bond AUM to $3.76 trillion and a 1% increase for passively managed AUM to $1.05 trillion for U.S. institutional tax-exempt clients.

For the year, meanwhile, the decadelong dominance of growth stocks over value stocks gave way to a more mixed performance, presaging the bigger shift in sentiment being seen in this year's newly volatile environment.

The top 25 managers of U.S. large-cap growth stocks for U.S. institutional tax-exempt investors saw their AUM climb 7.3% in 2021 to $1.05 trillion, narrowly besting the 7.1% gain to $338 billion for the 25 top managers of large-cap value stocks.

The greater sensitivity of growth stock valuations to rising rates has helped shift the market's focus to value from growth this year, noted R. Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group LLC, a Dallas-based value equity boutique with AUM of $8.4 billion as of March 31.

That shift has made the value sector relatively resilient in what has proven to be a miserable start for equities this year, with the S&P 500 Value index’s decline of 3.5% through May 31 just a fraction of the 21.1% plunge for the S&P 500 Growth index over the same period.

On most fronts, market veterans predict the going will be considerably tougher for money managers this year. In contrast to the optimism and policy support in recent years that made it easy to blast away any market concerns in short order, underlying sentiment now is pessimistic, with expectations that broad markets will remain in the red this year and into 2023, said Andrew Hendry, Singapore-based head of distribution for Asia (ex-Japan) with Janus Henderson Investors, with $432.3 billion in AUM as of Dec. 31. The firm reported a drop in AUM to $361 billion as of March 31 in its latest earnings.

In that environment, money managers will necessarily have to focus more on cost controls, paring back expansion plans that were predicated on the tailwinds of recent years continuing, he said.

But that doesn’t mean money managers will be bereft of opportunities, analysts say.

The TINA situation of recent years has changed — there are indeed alternatives now, noted Mr. Chemouny — among them, “U.S. investment-grade fixed income and above.”

Following increases in yields this year on the order of 150 to 300 basis points, depending on the sector, “we’re a bit back to basics” when it comes to the role investors expect bonds to play in their portfolios, said Kimberley Stafford, managing director and global head of product strategy with Newport Beach, Calif.-based Pacific Investment Management Co. LLC.

While rising rates have meant a drop in the prices of bonds investors currently hold in their portfolios, “we always say the journey to higher rates is very painful but the destination” — providing better entry points for new allocations — “is a good one,” Ms. Stafford said.

Amid expectations now of increased volatility and risks of recession, “we are seeing a lot of institutional clients actually pivoting back to core bonds in terms of their asset allocation,” she said.

PIMCO reported $1.71 trillion in AUM as of Dec. 31, up 4.8% from the year before.

Mr. Chemouny said Natixis is noticing a similar pickup in interest now. “I’m seeing huge investors, like the big Japanese pension plans, like the big Chinese investors authorized to invest abroad, the sovereign wealth funds around the world,” looking to allocate more to fixed income again.

Justin George Muzinich, president and CEO of $39.4 billion New York-based credit boutique Muzinich & Co., said this year’s market cycle shouldn’t be fundamentally different from previous ones, with certain asset segments doing well and others not. For Muzinich now, the firm’s floating rate strategies are doing quite well, he said. Muzinich had $5.4 billion in floating rate strategies.

“There’s no perfect solution but in a world where the two big risks on people’s minds are recession and inflation, senior secure floating rate credit, both public and private, is a reasonable place to be because you’re senior in the capital structure if you’re worried about recession and you’re floating rate if you’re worried about inflation,” he said.

Like Ms. Stafford, Mr. Muzinich said the rise in yields this year has made opportunities in public bond markets interesting as well. With the U.S. high yield market now yielding 7.5% for B, BB, excluding CCC, “if you have a four-year holding period, you’re potentially making over 25% in coupon,” and assuming 30% or 40% recovery rates, default rates would have to be close to those seen during the global financial crisis for investors to lose money.

If expanded opportunities for bond managers count as a new development this year, interest in ESG-focused segments such as clean energy-related allocations is an area of continuity, market participants say.

For 2021, P&I’s money manager survey data showed assets managed under ESG principles jumping 21.9% to $28.03 trillion.

Mr. Chemouny said the determination of clients in the wake of Russia's invasion of Ukraine to lessen dependence on energy producers “you didn’t really like but you were closing your eyes” on has been a fascinating development this year. “Now your eyes are wide open and there’s no way you can continue fueling Russia with billions every day,” a conviction reflected in the strong interest investors are showing now to participate in clean energy funds from Natixis sustainable investing boutiques such as Mirova and Vauban Infrastructure Partners, both based in Paris, he said.

Meanwhile, even equities are attracting allocations from some investors, despite what has been an ugly environment for the asset class this year, some managers report.

In contrast to previous episodes of extreme market volatility that left many investors frozen like deer in the headlights, “we don’t see that this time at all,” said Gregory A. Ehret, CEO and executive director of PineBridge Investments LLC, the New York-based money management firm with global AUM of $148.7 billion as of Dec. 31.

A couple of sophisticated clients have been rebalancing consistently into equities as the markets have gone down, lowering the cost basis of their equity portfolios, he said.

PineBridge has enjoyed net inflows of roughly $3 billion this year, or 28% of the firm’s target for 2022, Mr. Ehret said.

More broadly, the big changes this year in the macro-policy and economic outlook haven't led to significant changes for the company’s 10-year business plans, he said, noting that as a private company PineBridge is under less pressure to respond to shorter-term shocks than a public company that has to manage to shareholder expectations.