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Alpha is swell, but not when it comes with lurching volatility. As pension plan sponsors look across markets and asset classes to find ways to enhance their generally lackluster returns, they are increasingly thinking about risk management.
This renewed focus on controlled risk amid the scramble for returns has given plan sponsors a growing appetite for such strategies as absolute return, portable alpha and core satellite, in which they mix a beta core with high-alpha satellites.
“We’ve done a lot of risk-budgeting work for clients,” reports Jeffrey Nipp, head of investment research at consulting firm Watson Wyatt Worldwide. “One thing to emerge from that has been a move to core-satellite equity structures.” Generally, attention to risk management also seems to be sparking a taste for quantitative asset management.
Boasting an especially robust quantitative platform, Goldman Sachs Asset Management takes top honors in the 2005 Pension Olympics for the first time, with 28 new clients. Although GSAM may be best known for its quantitative strategies, its investment professionals include a lot more than math geeks. “We have a diverse series of investment platforms,” notes Eric Schwartz, co-head of GSAM, which did not appear in the rankings last year. “It includes active equity and fixed income, and alternatives. And we do have a big quant business.” No one area dominated new business for 2004, Schwartz says. He points out that GSAM has plenty of capacity left in its chosen strategies. “Generally speaking, we are still a relative newcomer to this business,” he says.
To ensure greater consistency this year’s results are calculated differently from those in past surveys: Whereas previous Olympics ranked managers by the number of new clients added less clients lost, the 2005 standings reflect only clients won and funded during calendar 2004.
Second in new clients, with 27 wins, is Barclays Global Investors. “In the past five years, we’ve seen a sea change in how sophisticated pools of assets are managed,” notes cochief executive officer Blake Grossman. Supported by the firm’s prolific quantitative research team, this shift has manifested itself in greater demand for BGI’s risk-controlled enhanced-index products for U.S. and international equities and in progressive active strategies.
“We’ve seen significant interest in long-short equities and in currencies,” Grossman explains. “They’re being used to manage existing portfolio risk or to capture alpha from another market.” BGI now ranks as one of the world’s biggest hedge fund managers to the institutional market: The firm’s global hedge fund assets totaled $9.5 billion at the end of 2004, up from $6.9 billion a year earlier.
Placing third in new clients, with 25 wins, is Prudential Financial, which did not appear in the 2004 ranking. Most of its new inflows came from defined benefit plans, with fixed-income mandates accounting for more than half of the new business, says CEO Bernard Winograd. Prudential gained assets through long-duration products and asset-liability matching. Each has a distinct risk-control component. Prudential’s real estate sector also won a significant number of mandates.
With 24 added assignments, Fidelity Investments claims the No. 4 spot, down from second in the 2004 ranking. In contrast with other managers, which found quantitative products to be among the strongest sellers, Fidelity landed its new mandates predominantly for traditional strategies, particularly fixed income and international equities, says Drew Lawton, president and CEO of the institutional arm, Fidelity Management Trust Co.
Fixed-income giant BlackRock wins fifth place for a third consecutive year. Many of its 19 client wins reflect the firm’s efforts to broaden its product line beyond fixed-income management. “We’re still winning core fixed-income business,” says Barbara Novick, a managing director and head of global business development. “But the trend is for nontraditional mandates.” Two mandates are for the firm’s equity products, four are for absolute-return fixed-income strategies, and three are for long-duration fixed income.
The Pension Olympics champion in both 2004 and ’03 -- Milwaukee-based value equity manager Artisan Partners -- gained 16 new clients in this year’s competition. It is tied for sixth place with Boston Co. Asset Management and Enhanced Investment Technologies, or Intech. But then, as Artisan CEO Andrew Ziegler points out, three of the firm’s five winning strategies were closed to new clients during 2004. And even though two of the four products that Artisan still has on the market have short track records, Ziegler boasts, “we still had a terrific year in 2004.” Artisan managed a 22 percent increase in its institutional assets last year, to $27.5 billion.
The debut appearance of Intech -- a Palm Beach Gardens, Florida–based quantitative manager of four large-capitalization equity strategies -- testifies to the pension fund’s new focus on risk. All Intech strategies are risk-controlled, and they are all sizzling sellers. Last year, Intech assets increased by 80 percent, to $25.8 billion, following a 96 percent jump in 2003 (see above for biggest dollar gainers).
Founded in 1987, Intech became a subsidiary of Janus Capital Group three years ago. It bases its investment style on the mathematical research on index construction of Robert Fernholz, Intech’s chief investment officer.
Enhanced-index funds continue to be popular with pension funds and other institutional investors. BGI and GSAM have seen strong sales in their enhanced-index products based on equities. Pimco (tied for No. 11) and BlackRock have done well selling enhanced-index funds based on bonds and futures.
Money managers benefited last year from increased employer contributions to corporate pension plans. Still feeling the fallout from the 2000–'02 bear market -- many plans report weak funding ratios -- companies sought to prop up their pension funds by funneling in new cash. “A lot of companies have made pension contributions,” says BlackRock’s Novick. “It’s dwarfing anything else that is going on.”
One result: Total assets gained by the top ten firms in the Pension Olympics rose sharply last year, from $260 billion to $408 billion. That made the risk-watching all the more rewarding for money managers.
The Pension Olympics is based on data compiled by New York–based Thomson Financial/Nelson Information; Researcher Russell Bradley-Cook and Associate Editor Donovan Hervig fact-checked and gathered additional information. The feature ranks firms that achieved the largest number of new client gains from among the top 1,000 corporate, public and union funds, including endowments and foundations, in calendar year 2004. All are major funds, the smallest of which had assets of $821 million last year. Pension fund accounts are not counted as gains unless they represent new relationships and were funded in 2004. Defined benefit and defined contribution plans are included; to be counted the latter must include fund management, not recordkeeping or administrative services alone.
