This bear market is displaying a stubbornness of historic proportions. For the year ended June 30, 2001, the Toronto Stock Exchange 300 Total Return index is down 12.7%. The Standard & Poor's 500 Total Return index (measured in U.S. dollars) dropped 14.8%. The Morgan Stanley Capital International EAFE Total Return index (again in U.S. dollars) is down 14.4%. On the fixed income side, the Scotia Capital Markets Universe Bond index rose 6.2%.

A remarkable 19 of the Top 40 Money Managers saw their Canadian pension assets under management decrease during the year ended June 30, 2001. We haven't seen that many firms in the red since benefits canada began tracking the country's leading management firms in 1977 (see "The Top 40 Money Managers of 2001").

Sceptre Investment Counsel Limited is reporting the largest percentage decrease among the Top 40. It is down 41.9% to $7.3 billion. Close behind, reporting a 41.6% drop, is Elliott & Page Ltd. That firm has $3.6 billion under management. These companies are certainly not alone though. Knight, Bain, Seath & Holbrook Capital Management Inc. slipped 34.9% to $7.7 billion. Put an asterisk beside that number though. The firm excluded assets managed as part of a revenue-sharing agreement with a Canadian small cap partner. A spokesman at Knight, Bain says that's the "primary" reason for the year-over-year decline. Laketon Investment Management Ltd. dropped 34% to $2.8 billion. Montrusco Bolton Investments Inc. is down 31.7% to $3.5 billion.

Total Canadian pension assets managed by the 40 leading firms rose just 2.9% over last year's Top 40 total, to $426.4 billion. That rate of growth is down sharply from last year's increase of 18% among the 40 largest firms. In fact, it is the lowest growth rate since 1990.

The Top 40 Money Managers saw their Canadian pension assets under management increase 7.4% for the year ended June 30, 1999, 10.5% as of June 30, 1998, 26.5% as of June 30, 1997 and 15.6% as of June 30, 1996. Those five year-over-year increases average out to 15.6%. No matter how you cut it, 2.9% growth is a reminder of the obvious. This industry is sensitive to capital market conditions.

"This is a pretty mature business," says Tom Bradley, president and chief executive officer of Phillips, Hager & North Investment Management Ltd. in Vancouver. "When somebody wins an account, generally somebody loses it on the other side . . . I don't know that I'd get too alarmed with 19 out of 40 shrinking. That's the reality of the kind of market we've been in."

"(YOU HAVE TO) GO BACK TO 1973/1974 TO SEE THIS TYPE OF SITUATION. WE WILL SEE ANOTHER WAVE OF MERGERS
AND ACQUISITIONS IN 2002 BECAUSE OF THIS."
--MICHEL NADEAU, PRESIDENT, CDP CAPITAL

There is $497.7 billion in Canadian pension assets managed externally as of June 30, 2001. That is up just 0.1% ($706.6 million) from the previous year (restated to include Quebec Pension Plan assets). We surveyed 160 firms, compared to 167 last year.

Not surprisingly, the number of firms managing $1 billion in Canadian pension assets or more dropped this year--from 74 last year to 69 as of June 30, 2001. The number of companies managing $10 billion-plus decreased, from 14 last year to 12 this year. Six of the 12 biggest pension asset managers are reporting negative growth for the year.

Enough doom and gloom, the year had its winners too. CDP Capital grew its pension assets more than any other firm--it's up $18.3 billion to $89.2 billion (see "Top 20 Fastest Growing," page 61). State Street Global Advisors Ltd. had a good year too, with a $5 billion increase to $15.4 billion. The third highest jump in dollar terms was at TD Asset Management Inc., a surprise to some given the firm's reputation as a strong passive manager. TD is up just under $5 billion to $28.7 billion.

One firm more than doubled its pension assets under management during the year. The largest percentage increase was at Frank Russell Canada Limited--the manager of managers grew its business 166.8% to $2.3 billion. Next was Putnam Investments, which increased 87.6% to $3.3 billion.

There are three entries on this year's Top 40 that weren't on last year's. The highest ranking is Alliance Capital Management Canada Inc. at No. 18. This is the result of a merger with Sanford C. Bernstein, which had dropped off the Top 40 between 1999 and 2000. Putnam Investments is new this year at No. 36. Brinson Partners, Inc. re-enters the Top 40, at No. 38, after slipping off between 1999 and 2000.

These three replace Leith Wheeler Investment Counsel Ltd., J.R. Senecal & Associates Investment Counsel Corp. and Gryphon Investment Counsel Inc.

Gryphon's slide down the Top 40 has been extraordinary. At one time a solid leader in the Canadian pension asset management business, the firm began to lose business in 1997. That year the firm dropped from No. 7 to No. 11. It has been falling in our ranking ever since. Gryphon did not report its assets under management to us this year.

The numbers are considerably stronger among the country's pooled fund managers (see "Top 20 Pooled Fund Managers," below). The pooled fund total is up a healthy 9.4%, or $20.6 billion to $240 billion.

CDP Capital leads this business with $89.2 billion under management. It is followed by TD Asset Management Inc. with $20.8 billion and Barclays Global Investors Canada Limited with $19.3 billion. The Top 20 have $205.6 billion under management.

Total assets under management, including retail business, rose just 1.8% or $20.7 billion during the year. (see "Top 20 Total Assets Under Management," page 63) The industry total has reached $1.2 trillion. The 20 largest money managers have $770.6 billion under management as of June 30, 2001. That's a 1.4% increase over last year.

There are some other interesting numbers this time out (see "The Big Picture," page 63). Mutual fund assets have dropped sharply--that business is down a remarkable $29.3 billion or 8.2% to $330 billion. Insurance segregated fund assets dropped $2.5 billion or 9.9% to $23 billion.

Endowment fund assets held steady, increasing $857.3 million or 3.2% to $27.9 billion. High net worth assets showed some growth too--that line of business grew $1.8 billion or 3% to $61.4 billion.

"THE ASSET-LIABILITY MIX IS OUT OF WHACK FOR A LOT OF PENSION FUNDS."
--JEFF HORBAL, VICE-PRESIDENT, INSTITUTIONAL INVESTMENTS, FIDELITY INVESTMENTS CANADA LTD.

Has this bear market led to an increased number of investment manager searches during the year? Jeff Horbal, vice-president, institutional investments of Fidelity Investments Canada Ltd. in Toronto--which introduced its foreign investment advisory services to the Canadian defined benefit pension business this year--says pension plan sponsors have two worries. "One is that the asset-liability mix is out of whack for a lot of pension funds," he says. "A lot are more concerned right now with just keeping their plans properly funded. Their second concern is asset allocation. We're still seeing a decent level of activity, and I think that's going to continue."

Tom Bradley at Phillips, Hager & North says his firm is seeing a "fair" amount of activity. "There's a lot of plans reassessing, doing asset-liability studies," he says. "The consulting community has been very busy working with plan sponsors. There's been many plans that have done a restructuring, lengthened out their duration on bonds or rebalanced to more foreign equities or something like that."

Part of the reason for the shift to fixed income is simple membership demographics. Canadians are getting older. "In many cases these plans are seeing an accelerated growth in their retired members versus new members," says John Montalbano, vice-president at Phillips, Hager & North in Vancouver. "So many of them are moving to an asset-liability matching program, which leads you to a fixed income portfolio almost entirely, or an immunization where you're matching the duration of your liabilities to your assets."

We asked balanced managers to submit a recommended portfolio mix as of June 30, 2001 (see "The Recommended Portfolio," left). On average, they're suggesting 34.3% Canadian fixed income, 32.7% Canadian equity, 16.8% U.S. equity, 8.7% non-North American equity, 3.2% cash, 0.3% real estate and 3.9% other.

This bear market is turning out to have quite a reach. The impact of the terrorist attacks on Sept. 11, and all that came after, has done little to stop the decline of capital markets around the world. Montalbano predicts that money management firms are going to face tough questions as third-quarter numbers hit the streets.

"You're [going to see] four-year returns that are below their actuarial assumptions," he says. "If this is a protracted bear market, I suspect you'll get a lot of mature plans that will strongly consider going into fixed income solutions such as long bond mandates, further evolvement into real return bonds or complete immunization."

There will be plenty to watch between now and June 30, 2002. BC