Blackrock Ditches Expensive Human Stock Pickers
Blackrock on Tuesday dove into the world of quantitative investing, moving $30 billion of the firm’s $5 trillion in assets into methods where computers will make stock picking decisions. The move will initially save $30 million annually as portfolio managers are leaving the firm. It comes as fees are being cut in half at the firm amid the widespread questioning of active management. Blackrock, for its part, is moving in the middle — offering an active investment managed by computers and offering the service at a passive fee.
Blackrock active management has lagged the mutual fund industry and lost to passive stock market benchmarks
What is behind the move to automated stock picking?
Blackrock actively managed funds have lagged rivals and stock market benchmarks for years. The fund’s 4% average annual returns pales in comparison to 5.3% for the average mutual fund and against US stock market benchmarks, whose average annual return is near 10%. Those returns in recent years have particularly lagged, a fact which has been explained from numerous perspectives.
Blackrock assets under management in its active management strategies fell by $42 billion over three years to end 2016 at $275 billion, according to the Wall Street Journal, which first broke the story.
Moody’s recently noted that low-fee passive investment strategies, which typically do not pick individual stocks, are expected to take over from active strategies in assets under management by 2024.
The move for Blackrock was tricky. The quantitative strategy will still retain active components but just charge lower fees. Active management generated nearly half of all fees on assets under management according to Fortune Magazine, a much higher percentage than its passive investment portfolio, where its iShares ETF product line has traditionally offered among the lowest fee products.
Larry Fink says democratization of information to blame for active downfall
Why have active managers underperformed? This could be the question upon which an industry’s fate rests.
Some managers have blamed central bank quantitative easing and financial repression for that lack of idiosyncratic stock performance. Other fund managers have claimed that measuring their fund’s performance to a stock market index is not an appropriate benchmark. But in discussing why he wants to go quantitative, Blackrock’s founder, Larry Fink, however, might have put a new wrinkle on the explanation.
In a statement, Fink said the democratization of information has made it difficult for active managers to outperform beta benchmarks. But what exactly does that mean?
Certain fund managers have claimed that because large- and mid-cap stocks are well covered by industry analysts, the good ideas are often found and then widely disseminated through the analyst community, which in effect makes them public.
Kensho Co-Founder and CEO Daniel Nader, who professes to use algorithms to interpret meaning in market moving events, said the move by Blackrock is an industry benchmark. Speaking on CNBC with Kelly Evans, he said the investing industry is moving from an age of relationships where inside information is no longer an acceptable business model. “Blue horseshoe loves Annacott Steel” is no longer acceptable, he said, referring to the 1987 movie “Wall Street.” This method of obtaining an informational edge “involved a lot of things that existed in the gray area of legality if not ethics.”
Regardless of the motivation, the move to quantitative active management is viewed as a bridge between the world of active and passive.
“It seems like the Vanguard approach to active equity management,” Jason Kephart, senior analyst at Morningstar was quoted as saying in Fortune. “The easiest way to make an active strategy more attractive is just to charge less for it.”
In a statement to ValueWalk, Morningstar’s Dan Culloton, Director, Equity Strategies further explained:
It has always been difficult for active managers to outperform their passive benchmarks, but investors have never been more aware of the fact. Investors have a lot of lower cost options today, from dirt cheap broad index funds to strategic beta offerings that harness modern computer processing prowess and academic research to systematically isolate and duplicate the factors that marginal active fundamental managers got away with leaning on for decades. More lower cost options is a good thing. But I don’t think this is a death knell for fundamental active management. It’s more of a clarion call for fundamental active managers to hone their edges and reconsider their fees. If you’re still charging middling to high fees for an approach that can arguably replicated by index funds or an algorithm, you have a problem. Investors have a lot less patience because they have all these low cost, low maintenance options and they can access all the data on the odds of active management outperforming on their phones and laptops. This doesn’t mean fundamental active management can’t succeed, but it’s never been more necessary to make sure you offer a competitive edge, charge a competitive fee, communicate clearly with your investors, and manage their expectations appropriately.
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Source: valuewalk