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The 2003 Pension Olympics

In 2002, the third consecutive year of a grim bear market, pension managers finally threw in the towel.

THE WINNERS
1. ARTISAN PARTNERS
2. PIMCO
3. FIDELITY INVESTMENTS


In 2002, the third consecutive year of a grim bear market, pension managers finally threw in the towel.

"Back in 2000 plan sponsors told their money managers, 'Hey, we understand you had a tough year. Stock markets will bounce back,'" recalls Stephen Timbers, president of Northern Trust Global Investments. "Then in 2001 plan sponsors said, 'You guys don't know what you're doing,' but they stuck around anyway. Last year they said, 'You guys still don't know what you're doing -- and now we give up.'"

Many pension plans began to replace their money managers in the middle of 2001. Last year the housecleaning got serious. According to iisearches.com, which captures most money manager hiring activity, plans replaced 670 managers in 2002, up from 505 in 2001 and 417 in 2000.

Some of the industry's most stalwart names, including AllianceBernstein Institutional Investment Management, J.P. Morgan Fleming Asset Management, Lazard Asset Management and Putnam Investments, lost a significant num- ber of high-profile accounts over the past year. Last summer the New York State Teachers' Retirement System dropped Lazard and Putnam from a combined $1.3 billion international equity assignment, replacing them with five new firms. In November the District of Columbia Retirement Board dropped AllianceBernstein from a $425 million equity account, shifting the portfolio to State Street Global Advisors. And in December the Connecticut State Trust Funds terminated J.P. Morgan Fleming from a $680 million bond portfolio; Western Asset Management picked up the account.

Plan sponsors hope to avoid firing a money manager, of course. Transferring a portfolio can be costly and cumbersome. Often, too, plan trustees who approved the initial hiring of an asset manager are reluctant to admit a mistake. But over the past year, they've gotten well beyond any squeamishness.

It's not simply that pension funds are cutting loose their poor performers. Plans are wary of any kind of volatility in portfolio performance, and they are seeking out money managers who are -- above all -- consistent. These favored asset managers stick to their style discipline and produce reasonably steady returns.

"There were plenty of firms that pushed the envelope and got singed in a variety of ways," says Christopher Pope, director of institutional marketing at Boston-based State Street Global Advisors. "When plans endure this kind of volatility and negative surprises, naturally they are going to gravitate toward managers with the most consistency in style and returns."

Small wonder, then, that Milwaukee, Wisconsin­based Artisan Partners, a privately held firm ($20 billion in assets) that prides itself on its prudent investment management and loyal staff, claims the top ranking in Institutional Investor's 25th annual Pension Olympics. (There has been no turnover among Artisan's portfolio managers since the firm was launched in 1995.) The third-ranked firm in the 2002 Olympics, with 22 net wins, Artisan moves up in the ranks by netting 37 new accounts from among the largest 1,000 pension funds in the U.S.

"Plan sponsors have never been more interested in consistency of returns and organizational stability," says Artisan CEO Andrew Ziegler. Formerly chief operating officer at Strong Capital Management, Ziegler launched Artisan with his wife, Carlene, who is now a small-cap portfolio manager at the firm.

Over the years no firm has been a more consistent performer in the Pension Olympics than Fidelity Investments, which ranks third with 16 net wins, trailing Artisan and Pimco. This marks the tenth straight year that Fidelity has claimed the first, second or third place in our rankings. The Boston-based mutual fund giant has more first-place finishes during the past quarter century than any other firm (see box, page 46).

Fidelity's strongest-selling products in 2002: international core equity and risk-controlled international equity, which remains country and sector neutral and adds value through a narrow band of stock selection. "There's real interest in risk- controlled strategies," says Drew Lawton, CEO of Fidelity Management Trust Co., the money manager's institutional arm. "Plans are forced to step back and really look at their asset allocations, taking on kind of a back-to-basics mentality."

These days, back to basics often means bonds, which is why the world's leading fixed-income manager, Newport Beach, California­based Pimco, snares the second-place spot. With the Lehman Brothers aggregate bond index returning 10.3 percent last year, versus a 21.9 percent decline in the Standard & Poor's 500 index, plan sponsors naturally sought out more fixed- income managers. No firm benefited from this trend more than Pimco, which pulled in $13.5 billion and registers 17 net wins.

"Pension boards normally take a long view, but they do look opportunistically when the value to be had is apparent," says William Thompson, Pimco's CEO. "As a result, high yield has been an asset class that's gotten a lot of attention."

At the end of 2001, fixed-income allocations represented a larger share of total plan assets than they had at the start of the year, simply because equity values had declined. In past years plan sponsors would adjust their portfolios, boosting stocks and shedding bonds. But in 2002 many plan sponsors apparently chose not to rebalance -- or to rebalance less than their asset allocation targets would require.

"There wasn't the same kind of rebalancing in 2002 as you saw in 2001," says Northern Trust's Timbers.

Two firms tie for fourth place with 11 net wins: Barclays Global Investors and BlackRock. Barclays also ranks as the largest dollar gainer of any money manager in this year's competition, hauling in nearly $45 billion (see box below). As plan sponsors look to cut costs, low-fee indexers seem especially attractive. Rival indexers Mellon Bond Associates, Northern Trust and State Street also fared well.

"Last year was exceptional for us, when you consider that we are predominantly a U.S. equity manager," says Blake Grossman, co-CEO of BGI. "I think the worse the markets get, the better we have fared, because of the confidence plans have in our organization."

Meanwhile, plans did not hesitate to jettison asset managers whose performance had become untenable. Last year no firm surrendered more institutional business than J.P. Morgan. It lost an estimated 17 percent, or 287, of its worldwide institutional accounts, according to company officials. Blame subpar returns in its flagship core-plus fixed-income portfolios, which returned 9.2 percent in 2002, more than 1 percentage point lower than the Lehman benchmark.

The firm's enhanced equity product also underperformed. Last year it trailed the S&P 500 by nearly 3 percentage points.

"The amount of business that was generated by J.P. Morgan's woes was staggering," says one industry member.

Another prestigious firm that has fallen from its perch is Boston-based Putnam Investments (see story, page 48). After ranking first in the 2001 Pension Olympics with 34 net wins and placing sixth in 2002, Putnam barely makes the cut this year with just four net pickups. The firm's large-cap growth separate- account product has badly lagged the S&P 500. That underperformance explains most of Putnam's lost pension business.

Putnam's crosstown rival, MFS Investment Management, made an impressive surge into the pension market in the late 1990s, only to falter in recent years. Known for decades as a retail shop, MFS notched six net wins in the 2001 contest for its first-ever appearance in the Pension Olympics. But the firm netted only four net wins last year, and this year it doesn't make the grade. MFS's growth investing strategy was top-heavy with technology, and the money manager badly underperformed.

Similarly humbled is AllianceBernstein. Before the October 2000 merger between Alliance Capital Management and Sanford C. Bernstein & Co., growth manager Alliance scored ten net wins and finished ninth in the 2001 rankings. In 2002, the second complete year for the combination with value manager Sanford C. Bernstein, the merged firms collaborated for just nine net wins. AllianceBernstein consistently found itself a significant owner of stocks that suddenly fell off a cliff, including Enron Corp., WorldCom and Qwest Communications. An AllianceBernstein spokesman says that on a net basis the firm took in more pension assets than it lost in 2002. Lewis Sanders, the former CEO of Sanford C. Bernstein who next month takes over from Bruce Calvert as CEO of parent company Alliance Capital, was unavailable for comment.

More loquacious is Artisan CEO Ziegler, who enjoys the sunny perspective of the top medal winner. "During a long bull market, sometimes it becomes difficult for a money manager to make any meaningful differential because the market just keeps going up and up. Sometimes, frankly, the less discriminating you were the better," Ziegler says. "Now we see that the firms with the most quantifiable value added tend to stick out and win business.

"We focus on the areas where there are still opportunities to add value," he says, explaining that his firm's product lineup focuses on small- and midcap U.S. stocks, adding value through concentrated bottom-up stock research.

Artisan has fared especially well with its international growth equity team, led by Mark Yockey, a 22-year veteran. His fund outperformed all but one of the 78 international stock funds as ranked by a Barron's/Value Line survey.

As a result of the firm's impressive track record, Artisan pulled in a $350 million active international mandate from the $21 billion Pennsylvania State Employees' Retirement System.

Artisan picked up a number of domestic assignments as well. This past summer the Mississippi Public Employees Retirement System hired Artisan to run a $300 million midcap growth portfolio, and at about the same time, the Milwaukee City Employees Retirement System hired the hometown firm for a $60 million small-cap growth mandate.

Ziegler knows that Artisan must continue to outperform if it hopes to attract new accounts -- and hang on to the ones it already has. "Plans want firms that can do it year in and year out," he says.


The Pension Olympics is based on data compiled by Port Chester, New York­based Nelson Information, then verified and revised for publication by Assistant Editor Erika Ihara and Staff Writer Rich Blake. The feature ranks firms that achieved the largest number of net new client gains from among the top 1,000 corporate, public and union funds in calendar year 2002. All are major funds, the smallest of which had assets of $643 million. Pension fund accounts are not counted as gains unless they represent new relationships and were funded in 2002. Defined benefit and defined contribution plans are included; to be counted, the latter must include fund management, not recordkeeping or administrative services alone.
THE MONEY MANAGER MARATHON

ARTISAN PARTNERS +37

added by:

AK Steel Holding Corp.

Amerada Hess Corp.

American Electric Power Co.

Arkansas Public Employees' Retirement System

BroadWing

Budd Co.

California State Teachers' Retirement System

ChevronTexaco Corp.

Christian Church Pension Fund

Clorox Co.

Corning

First Data Resources

Florida State Department of Insurance, Treasury Division

General Motors Corp.

ICMA Retirement Corp.

Illinois Tool Works

Kern County (CA) Employees' Retirement Association

Kmart Corp.

Lifespan Corp.

McDonald's Corp.

Milwaukee (WI) Employees' Retirement System

Mississippi Public Employees' Retirement System

Montana Board of Investments

Morgan Stanley

Motion Picture Industry Pension & Health Plan

New York State Teachers' Retirement System

North Carolina Retirement Systems

Potlatch Corp.

San Diego County (CA) Employees Retirement Association

Sears, Roebuck & Co.

Tektronix

Thomson Corp.

Towers Perrin

TXU Corp.

Wayne County (MI) Employees' Retirement System

Weirton Steel Corp.

Wyoming Retirement System

PIMCO +17

added by:

California Public Employees' Retirement System

Ceridian Corp.

CNA Financial Corp.

Coca-Cola Co.

Coca-Cola Enterprises

CWA/ITU Negotiated Pension Plan

Furniture Brands International

Greyhound Trusts

Iron Workers D.C., Southern Ohio & Vicinity

Kennametal

Lyondell Chemical Co.

Massachusetts Bay Transportation Authority

Ohio Public Employees Deferred Compensation

PepsiCo

Rohm & Haas Co.

9 confidential clients

dropped by:

Newport News Shipbuilding

Pacific Maritime Association

TRW

4 confidential clients

FIDELITY INVESTMENTS +16

added by:

Arkansas Public Employees' Retirement System

Carpenter Technology Corp.

Dallas (TX) Police & Fire Pension System

DeKalb (GA) Employees Retirement System

Eaton Corp.

Federal-Mogul Corp.

Florida State Department of Insurance, Treasury Division

ICI Americas

Longshoremen, ILWU-PMA Benefit Plans (San Francisco, CA)

Ohio Public Employees' Retirement System

Orange County (CA) Retirement System

Pfizer

Philip Morris Cos. (Altria Group)

Progress Energy

R.J. Reynolds Tobacco Holdings

San Diego (CA) City Employees' Retirement System

BARCLAYS GLOBAL INVESTORS +11

added by:

New York State Teachers' Retirement System

18 confidential clients

dropped by:

Contra Costa County (CA) Employees' Retirement Association

7 confidential clients

BLACKROCK +11

added by:

15 confidential clients

dropped by:

4 confidential clients

ARONSON + JOHNSON + ORTIZ +10

added by:

American Federation of TV & Radio Artists (AFTRA)

Austin (TX) City Employees' Retirement System

Banco Popular de Puerto Rico

Charles Schwab Corp.

Dun & Bradstreet Corp.

Louisiana State Employees' Retirement System

Oklahoma Firefighters Retirement System

Plumbers & Pipefitters, National Pension Fund (VA)

Rohm & Haas Co.

San Bernardino County (CA) Employees' Retirement Association

STATE STREET GLOBAL ADVISORS +10

added by:

Aon Corp.

Arkansas Teachers Retirement System

ChevronTexaco Corp.

DuPont De Nemours E.I. and Co.

El Paso Corp.

Greyhound Trusts

Guardian Life Insurance Co. of America

National City Corp.

New York State Teamsters Benefit Funds

Oklahoma Police Pension & Retirement System

Pittston Brink's Group

Towers Perrin

Utah State Retirement System

Walgreen Co.

dropped by:

Applera Corp.

Philips Electronics North America Corp.

Tribune Co.

TRW

SYSTEMATIC FINANCIAL MANAGEMENT +10

added by:

Casey Family Program

Engineers, Operating, Locals #302 & #612

Medtronic

Missouri Public School Retirement System

New York State Teachers' Retirement System

Oklahoma Firefighters Retirement System

J.C. Penney Co. (Holding Co.)

Potomac Electric Power Co.

San Bernardino County (CA) Employees' Retirement Association

United Parcel Service (UPS)

ARIEL CAPITAL MANAGEMENT +9

added by:

American Bar Retirement Association

Walt Disney Co.

Fortune Brands

Koch Industries

Longshoremen, ILA, STA-ILA Pension Trust Fund (Baltimore, MD)

New York City Deferred Compensation Plan

New York City Retirement Systems

New York City Teachers' Retirement System

New York State Common Retirement Fund

North Carolina Retirement Systems

Verizon Communications

1 confidential client

dropped by:

Exelon Corp.

FMC Corp.

Northrop Grumman Corp.

MELLON BOND ASSOCIATES +9

added by:

Arizona State Retirement System

Bayer Corp.

Eastman Kodak Co.

Fairfax County (VA) Retirement Administration Agency

Freddie Mac

Nature Conservancy

Nevada Public Employees' Retirement System

Verizon Communications

West Virginia Investment Management Board

STRONG CAPITAL MANAGEMENT +9

added by:

Florida State Department of Insurance, Treasury Division

Indiana Public Employees' Retirement Fund

Missouri Local Government Employees' Retirement System

North Dakota State Investment Board

J.C. Penney Co. (Holding Co.)

Salt River Project

Sheet Metal Workers National Pension Fund

St. Louis (MO) Police Retirement System

1 confidential client

VICTORY CAPITAL MANAGEMENT +9

added by:

American Electric Power Co.

Computer Associates International

Cooper Tire & Rubber Co.

Federal Reserve Employee Benefits System

Iron Workers D.C., Southern Ohio & Vicinity

Maytag Corp.

Ohio Bureau of Workers' Compensation

Science Applications International Corp.

Timken Co.

BRANDYWINE ASSET MANAGEMENT +8

added by:

Building Trades United Pension Trust Fund

Campbell Soup Co.

Fairfax County (VA) Retirement Administration Agency

Invensys ENE

Oklahoma Firefighters Retirement System

ONEOK

United Parcel Service (UPS)

Whirlpool Corp.

BOSTON CO. ASSET MANAGEMENT +7

added by:

American Chemical Society

PacifiCorp

5 confidential clients

AELTUS INVESTMENT MANAGEMENT +6

added by:

8 confidential clients

dropped by:

2 confidential clients

AXA ROSENBERG INVESTMENT MANAGEMENT +6

added by:

Cinergy Corp.

DaimlerChrysler Corp.

Deloitte & Touche

Inter-American Development Bank

IBM Corp.

Kroger Co.

BANC ONE INVESTMENT ADVISORS CORP. +6

added by:

Aetna

American Electric Power Co.

Carpenters Pension Fund, Detroit & Vicinity

Florida State Department of Insurance, Treasury Division

Louisiana Teachers' Retirement System

Nevada Public Employees' Retirement System

Oklahoma Firefighters Retirement System

Sempra Energy

dropped by:

Dow Chemical Co.

Indiana State Teachers' Retirement Fund

COLUMBIA MANAGEMENT +6

added by:

Arizona State Retirement System

Detroit (MI) General Retirement System

Detroit (MI) Policemen & Firemen Retirement System

UFCW, Midwest

2 confidential clients

INVESCO +6

added by:

Equity League Pension & Health Trusts

New York City Teachers' Retirement System

San Mateo County (CA) Employees Retirement Association

Santa Barbara County (CA) Employees' Retirement System

Southern Co.

Wyoming Retirement System

JARISLOWSKY FRASER +6

added by:

6 confidential clients

HARTFORD INVESTMENT MANAGEMENT CO. +5

added by:

California State Teachers' Retirement System

Hartford (CT) City Municipal Employees' Retirement Fund

Kmart Corp.

Northeast Utilities

Owens Corning

MACKAY SHIELDS +5

added by:

Chicago (IL) Municipal Employees Annuity & Benefit Fund

Florida State Board of Administration

Los Angeles (CA) Fire & Police Pension

Motion Picture Industry Pension & Health Plan

New Hampshire Retirement System

New York City Retirement Systems

Rhode Island Employees Retirement Systems

dropped by:

Litton Industries

Louisiana Teachers' Retirement System

RREEF +5

added by:

5 confidential clients

CAPITAL GUARDIAN TRUST CO. +4

added by:

4 confidential clients

PUTNAM INVESTMENTS +4

added by:

15 confidential clients

dropped by:

11 confidential clients

TURNER INVESTMENT PARTNERS +4

added by:

American Bar Retirement Association

Indiana Public Employees' Retirement Fund

Energy East Corp.

General Motors Corp.

McDonald's Corp.

Milwaukee (WI) Employees' Retirement System

National Football League

dropped by:

Crown Cork & Seal Co.

DaimlerChrysler Corp.

Massachusetts Pensions Reserve Investment Management Board

WALL STREET ASSOCIATES +4

added by:

American Federation of TV & Radio Artists (AFTRA)

Baton Rouge City & Parish of East Baton Rouge (LA) Employees' Retirement System

Nstar

Tulare County (CA) Employees' Retirement Association

 
THE BIGGEST DOLLAR GAINERS

Sometimes the variation is more appealing than the theme.

Two of the three biggest dollar gainers in the Pension Olympics -- Barclays Global Investors and Northern Trust Global Investments -- are known for their passive investing. (The third, Invesco, is known for its active equity products.) But in the past two years, Barclays and Northern Trust have seen surging interest in their enhanced indexing products. This portfolio strategy follows the basic premise of passive investing -- benchmark returns at modest cost -- and then adds a taste of the promise of active management, beating the benchmark by a tiny margin with stringent risk controls.

"I'd say about one third of our new business came in risk-controlled equity," explains Blake Grossman, co-CEO of BGI, citing Barclay's term for enhanced indexing. "I think institutions are comfortable with what we do as far as straight-on passive investments. Because they like what they've seen, they are looking to us for more active strategies." BGI added a net $44.7 billion in tax-exempt assets during 2002.

Adds Kevin Rochford, director of global marketing at Northern Trust: "The areas where we saw the most interest were in quantitative or enhanced equity and fixed income. You saw a lot of clients who thought they were paying for active management but just were not seeing the returns to justify the active fees. So instead they are turning to enhanced index products, which may have a more limited upside but also provide more certainty and lower fees." An enhanced indexer might charge 28 basis points for a $100 million equity account, versus 5 basis points for a pure index fund and 44 basis points for an active fund. Northern Trust's institutional assets increased by $21.9 billion last year.

During an unprecedented third straight year of double-digit losses for the Standard & Poor's 500 index, it comes as no surprise that fixed-income managers did comparatively well. Of the top ten biggest dollar gainers, five are best known for their fixed-income investing. Pimco, which finished third among dollar gainers last year with $12.1 billion in net new tax-exempt assets in 2001, drops down to the eighth spot this year, although it gained more assets -- some $13.5 billion.

"This bear market for equity has gone on longer than anyone thought, and there is still a lot of uncertainty," explains Pimco CEO William Thompson. "In this kind of environment, fixed income tends to be a more attractive asset class." Most of Pimco's new pension accounts came into its core total-return portfolios; high-yield products also attracted strong interest.

"The No. 1 subject on the minds of pension plan executives is, How am I going to get there from here?" Thompson continues. "The assumptions going forward are for low-single-digit returns for stocks and bonds, so this is as challenging an environment as we've ever seen. But this investment community is doing a good job of looking out over the long term."

BlackRock added $14.1 billion to make it the No. 7 gainer, winning several huge accounts, including a $500 million core-plus fixed-income mandate from the Illinois State Board of Investment and a $120 million core-plus portfolio from Kimberly-Clark Corp. Says Barbara Novick, BlackRock's director of marketing, "Core-plus continues to draw the most interest."

The table above, ranking firms according to dollar gains in U.S. tax-exempt institutional assets during 2002, reflects growth from market appreciation as well as new contributions. Acquired assets and assets reallocated by a corporate parent were not counted. Assistant Editor Erika Ihara gathered the information, which was verified by Staff Writer Rich Blake, who wrote this article.

MANAGERNET CHANGE IN TAX-EXEMPT ASSETS OF U.S. CLIENTS ($ MILLIONS)
Barclays Global Investors$44,700
Invesco28,243
Northern Trust Global Investments21,900
Mellon Bond Associates19,499
Banc One Investment Advisors19,375
Deutsche Asset Mgmt14,184
BlackRock14,067
Pimco13,540
Federated Investors11,747
Dodge & Cox9,451
 
QUARTER CENTURY COUNTDOWN

In the winter of 1979, the Dow Jones industrial average was trading at about 800 and investors were deeply skittish about stocks. At the same time, pension money was moving away from the big banks and toward independent money managers -- in the jargon of the era, "investment counselors." Many of these managers were themselves defectors from bank trust departments, searching for more money and greater autonomy, and many of their clients followed them to their new start-up firms. The editors of Institutional Investor decided to see which firms were bringing home the most blue-chip accounts. So was born our annual Pension Olympics. Surveying 351 of the largest corporate pension funds, the magazine published the findings of its big-money sweepstakes in its February issue.

That first year, Fayez Sarofim & Co., a well-regarded, Houston-based large-cap growth specialist, snared the top prize with a net pickup of 15 accounts in 1978. Looking back on the past quarter century, Fayez Sarofim says: "Today's market is much more volatile. Stocks have become more susceptible to headline risk."

Through the years firms have fallen in and out of favor, much like the asset classes in which they specialized. In 1989, when property prices were soaring, one of the top finishers was Copley Real Estate Advisors. It finished second the next year and never appeared on the list again.

Overall, Fidelity Investments ranks as the top performer over the past quarter century, with six first-place finishes. The Boston-based fund giant first began to attack the defined benefit business in the early 1980s, selling two main products, a commingled large-growth fund managed by Peter Lynch and a similar vehicle for large value managed by Bruce Johnstone. Fidelity netted 11 mandates in 1985 to claim the top spot and repeated as champion the following year with 22 net gains. By then the firm offered small-cap growth and fixed-income products geared toward institutional investors. "Broadening the product lineup was the key to our success," recalls John Cook, a former Fidelity sales executive who is now the managing director of Seaward Management, a Boston-based investment boutique.

A few years later Fidelity began to sell corporations a package of bundled defined-contribution-plan services, an effort that took off in the late 1980s and helped the money manager garner back-to-back top rankings in 1995 and 1996. In winning last year, Fidelity benefited from success in the defined benefit market. Says Drew Lawton, who heads Fidelity's pension business today, "It would be nice if we can keep this up over the next 25 years." -- R.B.

GOLD STARS

1. Fidelity Investments 1985, 1986, 1989, 1995, 1996, 2002

2. Putnam Investments 1993, 1994, 2001

3. Sanford C. Bernstein & Co. 1984, 1985

Brinson Partners 1992, 1993

Morgan Stanley Asset Mgmt 1991, 1993

State Street Global Advisors 1997, 1998

Wells Fargo Investment Advisors 1987, 1989

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