Worldwide assets rise 9% for largest index managers

Worldwide indexed assets under management rose for the third consecutive year, reaching $14.57 trillion for money managers that participated in Pensions & Investments' annual survey. Over the year ended June 30, indexed assets increased 9%, up from $13.37 trillion.

By asset class, U.S. equities represented the largest share of worldwide indexed assets in both passive and enhanced index strategies, at $6.97 trillion, up 8.6% over the year.

"U.S. equities is dominating the number of inquiries we are getting for new passive mandates," said Chris Riley, partner and head of global equity manager research at Aon Hewitt Investment Consulting Inc., Chicago.

This is as the S&P 500 index posted returns of 8.22% for the year ended June 30.

"Unless something materially changes from a market perspective," Mr. Riley said, he expects U.S. equity mandates to continue to represent the lion's share of passive assets among investors.

While U.S. equity mandates dominated worldwide indexed assets managed by survey respondents, global equities experienced the fastest growth rate for the one-year and five-year periods. Worldwide indexed assets in global equities rose 19.2% to $1.46 trillion for the year and 106% for five years, up from $709.6 billion.

That occurred as the MSCI All Country World index returned 5.74% for the year and 6.16% for the five years ended June 30.

Christopher Philips, head of institutional advisory services at Vanguard Group Inc., Malvern, Pa., said the firm has seen some institutional investors pull back on allocations to U.S. equities this year.

"The question of the year has been, how much more can the U.S. equity market go up from here? There's been a reallocation from U.S. equities into global equities," Mr. Philips said of indexing trends.

In the survey, worldwide indexed assets in U.S. fixed income saw the second-largest percentage growth over the year, a 13% rise to $1.99 trillion.

Five-year AUM growth was even more pronounced within U.S. fixed income at 89.6%, while worldwide indexed assets in these strategies grew from $1.05 trillion as of June 30, 2014, survey data showed.

For the year ended June 30, the Bloomberg Barclays U.S. Aggregate Bond index returned 7.87%, while returns for the five-year period were 2.95%.

Among money managers' U.S. institutional tax-exempt clients, indexed assets grew 9% over the year to $4.68 trillion. Over the five-year period ended June 30, indexed assets managed for the institutional segment jumped 47.4%.

In the U.S. institutional tax-exempt universe, defined contribution plans represented the largest percentage of manager assets. Firms managed $2.44 trillion in indexed assets for U.S. DC plans, up 12.5% from last year and 69.1% from June 30, 2014.

Endowments and foundations represented index managers' fastest growing segment of institutional, tax-exempt clients in the U.S. Indexed assets managed for U.S. endowments and foundations grew 27.8% to $177.8 billion year-over-year, and were up 97.1% over the five-year period.

State Street Global Advisors, Boston, was the largest manager of indexed assets for U.S.-based endowments and foundations this year, up 18.9% to $73 billion. Vanguard came in second with $47.7 billion, a 72.9% increase.

"Endowments and foundations have been the last widespread bastion of active management," Vanguard's Mr. Philips said. "They are realizing that if they are going to have a risk budget, then they are better off spending (it) on something other than active management."

Additionally, endowments and foundations have been prompted to move toward passive investing as active equity and fixed-income managers have been "challenged to have consistent outperformance to justify the fees going into those programs," he said.

"We've seen them move money from traditional active managers and hedge funds and reallocate to passive and illiquid portfolios, such as private equity, private credit and private real estate," Mr. Philips added.

Aon Hewitt Investment Consulting also has seen endowments and foundations migrate to passive management, particularly after core active equity strategies failed to deliver outperformance relative to fees, according to Heather Myers, partner, non-profit practice leader, at the firm.

In addition to endowments and foundations putting a greater focus on the cost vs. value of investment strategies, they also may be using index strategies as placeholder funds while changing asset allocations or money managers, said Tyler Cloherty, senior manager and head of the knowledge center at Casey Quirk, a practice of Deloitte Consulting LLP.

"Endowments and foundations are a more and more attractive target for distribution, relevant to other institutions," he added.

Indexed assets among U.S. defined benefit plans were barely up for the year at $1.14 trillion, a 1.4% increase. Over the five-year period ended June 30, indexed assets managed for U.S. defined benefit plans were up 3.6%, the survey found.

As DB plans continue to mature and derisk, "there is inherently less equity in their portfolio," Mr. Cloherty said. "As (DB plans) close and go into payout stages, they are moving more into liability-driven assets, which are more heavily tilted toward fixed income. In many cases, this means they are drawing down on their equity allocations," including indexed assets, he said.

Over the year, the race between BlackRock Inc., New York, and Vanguard for the title of largest index manager tightened even further.

While BlackRock remained the largest manager of worldwide indexed assets managed internally, with $4.5 trillion as of June 30, Vanguard was close behind with $4.31 trillion.

The year prior, the gap between the indexing giants was slightly larger, with BlackRock managing $4.15 trillion to Vanguard's $3.86 trillion as of June 30, 2018.

The majority of both managers' indexed assets were across U.S. and international equity strategies, P&I survey data showed.

State Street remained the third-largest manager of worldwide indexed assets, with $2.23 trillion as of June 30, up 9.6% from a year earlier.

The ranking of the largest money managers by U.S. institutional tax-exempt indexed assets, however, had Vanguard in the lead again with $1.24 trillion, up 14%, and widening the gap between it and BlackRock.

BlackRock, with $1.15 trillion in U.S. institutional tax-exempt indexed assets, retained its No. 2 spot, growing 6.2% over the year. Vanguard took over the top spot in 2018 with $1.088 trillion in AUM, compared with $1.086 trillion for BlackRock.

State Street again was the third-largest manager, with $694.7 billion in U.S. institutional tax-exempt indexed assets, up 2.8 for the year.

Worldwide indexed assets managed in exchange-traded funds and exchanged-traded notes also grew over the year, up 13.8% to $4.31 trillion as of June 30. Over the five years ended June 30, passively managed assets in ETFs and ETNs increased 118.1%.

Todd Rosenbluth, director of ETF and mutual fund research at independent investment research firm CFRA Research, New York, said there have been significant inflows into ETFs over the past five years, but also noted that new money has been concentrated in a few places.

"The majority of the money is going into a small number of ETFs," he said.

Over the past five years, 100 ETFs accounted for 83% of cumulative asset growth across 1,662 listed ETFs in the U.S. that were tracked from December 2014 to August 2019, a September report from CFRA Research found.

In P&I's survey, the three largest ETF/ETN index managers by worldwide assets managed internally were once again BlackRock, with $2.01 trillion; Vanguard, with $1.02 trillion; and State Street, with $666.3 billion managed as of June 30.

Among the 10 largest ETF/ETN index managers in the survey, BlackRock and Vanguard together managed around 70% of worldwide assets reported in these investment vehicles.

CFRA's report also made note of this "winner-take-most" effect, stating that BlackRock and Vanguard dominated asset growth of the top 20 ETFs tracked.

Assets rise 9% for largest managers