America's largest overseas investors 2003

If the bear market has buffeted investors in U.S. equities, it has battered owners of European and Asian stocks. As the Standard & Poor's 500 index was falling on average 14 percent a year in the three years through 2002, the Morgan Stanley Capital International Europe, Australasia and Far East index was dropping 17 percent.

Rattled U.S. institutional investors withdrew a net $7 billion from tax-exempt overseas mandates in 2002, according to InterSec Research Corp., a Stamford, Connecticut­ based international financial data provider. Retail investors, meanwhile, yanked a net $3 billion out of foreign equity mutual funds, reports the Investment Company Institute, a Washington, D.C., fund industry lobbying organization.

Nonetheless, America's largest managers of non-U.S. securities proved to be a tenacious lot, stubbornly holding their ground in 2002. The assets they manage on behalf of mainly U.S. clients held steady at $2.6 trillion.

Emerging-markets bonds carried the day for many overseas investors (see story, page 50). The J.P. Morgan emerging-markets bond index returned 14.2 percent last year. At the same time, the non-U.S. bond assets of the overseas managers rose 30 percent, to $820.9 billion, mostly because of market appreciation -- especially in those emerging-markets bonds.

On a somewhat bittersweet note for investors in foreign stocks, although the EAFE index fell 16 percent in 2002, it still outperformed the S&P 500, which plunged 22 percent. This marked only the second time in the past eight years that the EAFE has outperformed the U.S. benchmark. Through late June the EAFE was up 9.2 percent for 2003, versus a 10.8 percent gain for the S&P 500.

In recent years the list of the top 50 non-U.S. securities managers has changed surprisingly little. San Francisco­based Barclays Global Investors, Los Angeles­based Capital Group Cos. and Boston-based State Street Global Advisors have held the top three slots, respectively, for the past two years.

The only changes within the top ten in this year's rankings: Allianz Dresdner Asset Management (U.S.) climbs from No. 16 to No. 7, knocking Franklin Resources down a step to No. 8. Allianz shoots up on the strength of subsidiary Pacific Investment Management Co.'s huge push into European bonds for both its core and global fixed-income portfolios. Axa Financial drops from No. 8 to No. 11.

Robert Ginis, head of international equity at BGI, says that hiring activity was tepid for much of 2002. But he notes that pension plans began to surge into foreign stocks this spring, just as the war in Iraq was starting to wind down. "Until then there was sort of a wait-and-see attitude about investing overseas, but we've seen a lot of activity since March," Ginis says.

Inevitably, though, the outlook for foreign securities investors remains clouded by the weak U.S. dollar. "It's a mixed blessing," says Michael Kagan, co-head of equities at Salomon Brothers Asset Management, part of No. 9-ranked Citigroup. "A stronger euro serves as a tailwind for the portfolio, but it hurts foreign companies that do business in the U.S. if they are converting depreciating dollars."

Taking the long view, InterSec predicts that the total allocations of U.S. institutional investors to overseas securities will rise from its current level of 11.9 percent to 12.7 percent by 2007. Explains Rick Bisignano, head of InterSec's performance consulting group, "More plans are implementing style diversification in their international programs."

The rankings were compiled by Senior Associate Editor Tucker Ewing.