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BlackRock cuts fund managers as trackers advance

Investment giant responds to threat from cheap, index-tracking funds by reducing reliance of its US business on human stock pickers.

 
BlackRock cuts fund managers as trackers advance

BlackRock, the world’s largest investment firm with $5.1 trillion of assets, has announced a shake-up of its US business that will reduce the number of its funds run by active stock pickers as it responds to the threat from cheap, index-tracking rivals.

The company has removed seven portfolio managers from funds with around $30 billion of assets under plans to shift more of its domestic business from active equity management towards a numbers-driven quantitative approach. Some will leave the group with BlackRock paying $25 million in severance and bonuses to those affected.

Although the changes do not affect any Blackrock funds managed outside the US they are significant in terms of how conventional investment managers respond to the challenge from trackers, in particular exchange traded funds (ETFs).

The group plans to launch a new range of funds called BlackRock Advantage, which will be made up of converted active equity funds and new offerings. The firm said the plan would save investors around $30 million per annum in lower fees.

The move comes as actively managed funds, particularly in mainstream equity markets, suffer significant outflows of money to passive funds such as ETFs.

While BlackRock’s iShares ETF business has been a huge beneficiary of this trend, taking in a record $140 billion in net flows in 2016, its active US-based equity business has suffered with $19.3 billion withdrawn from these funds last year, according to data from Morningstar.

The decision to move this part of the business away from human stock picking and towards a more machine-based quantitative approach has been taken by Mark Wiseman, BlackRock global head of active equities, who joined the firm from the Canada Pension Plan Investment Board last year.

Having reviewed the active equity business Wiseman has concluded it ‘needs to change,’ announcing: ‘Asset managers who simply use the same techniques and tools from the past will limit their ability to generate alpha and deliver on client expectations,’ he said. ‘The steps we are taking are an extension of the strategy we announced in 2016 to combine our quantitative and fundamental investment teams.’

The firm plans to place a greater focus on data analysis and invest further in technology to support its plans. It will segment its active equity offering into four product ranges: core alpha (including the new quant Advantage funds); high conviction alpha (run by active managers using unconstrained, absolute return strategies); outcome oriented (such as income funds); and country and sector specialist funds.

10 comments so far. Why not have your say?

martin verlaine

Mar 29, 2017 at 16:36

The whole tone of this type of note is based on the lowest charge being best for the client and that active fund management is ' dead in the water' because of the cost. The rush for transparency with charges will highlight that people want to see ' value for money' as opposed to thinking whether the benign investment conditions of the last few years have played into the hands of those who promote trackers. The next 5 years with the return of inflation and nobody clear on the impact of Trump may be different...........

I think City Wire published data yesterday that indicated over a reasonable view active Investment Trusts outperformed ETF over most sectors/countries enough said?

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Micawber

Mar 29, 2017 at 16:47

ETFs and index trackers tend to outperform active funds/trusts over time in the US markets, which are exhaustively researched (i.e. scope for stock-picking alpha is limited). As I read the above article, Blackrock's changes are limited to that US market.

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Law Man

Mar 29, 2017 at 17:47

The US is the region where it is most difficult to outperform the S&P500. The recent article on ITs -v- ETF trackers confirmed this.

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steggets

Mar 29, 2017 at 19:09

Although I have a couple of trackers I've never seen a tracker top any performance table.

I also like to think managed funds can react quicker when the markets take a dive.

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Alan Selwood

Mar 29, 2017 at 23:14

The great debate: Active or passive?

It seems to me that high-quality active managers perform better than trackers in most markets most of the time (The US is always cited as difficult to beat by using active management), but lower-quality managers and amateurs generally under-perform.

Edward Thorp, in the FT dated 4th Feb 2017, argued that unless you are a professional, you will make more money by investing in trackers, probably by about 2% p.a. on average.

So all we have to do is to decide whether we are skilful enough as individual investors to beat the trackers by our selections. If not, trackers will be the way to go (as Warren Buffett thinks would apply to his widow when the time comes).

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Stephen B.

Apr 02, 2017 at 11:27

I've just reviewed my portfolio for the end of the tax year: my overall TER is 0.9%. I have quite a few directly-held shares with no management cost (other than my time) and some trackers, but also quite a few ITs. If I were to live for another 40 years 0.9% compounds to 43% which is a substantial hit (i.e. I'd end up with 43% more if I paid nothing). On the other hand, much of the contribution to that cost is for private equity funds which are impossible to access any other way, and for specialist funds in areas where fund managers may well be able to add value. I think the question is whether those kinds of specialist areas are worth investing in at all - so far I think probably yes, private equity in particular has a generally good long-term record, but I intend to keep it under review.

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Law Man

Apr 02, 2017 at 12:30

Stephen B: an average 0.9% sounds reasonable. Well done.

On the drag on performance, if you say with 0% charges it grows by £100 while with 0.09% p.a. it grows by £57, then with the former you have 43/57 = 75% more. Frightening.

However, this is unavoidable. All we can do is:

(1) keep charges down by careful choice e.g. ETFs in some cases

(2) avoid platform fees of up to 0.45% p.a. in addition by use of ITs etc.

Private Equity: I can only comment that discounts to NAV have narrowed significantly recently; so I do not know how much further growth will emerge. They seem higher risk - could do very well, could lose a lot.

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Stephen B.

Apr 02, 2017 at 13:05

"On the drag on performance, if you say with 0% charges it grows by £100 while with 0.09% p.a. it grows by £57, then with the former you have 43/57 = 75% more. Frightening."

That's not really correct, it depends on the assumed growth. Assume 5% growth per year, over 40 years £100 would turn into £704. With a 0.9% charge it would be £499, so the gain is about 2/3 as much. With growth of 15% the numbers would be £26,786 and £19,563, so the reduction in growth is a smaller fraction but a much bigger number. Of course, if you had to pay 3% to get a 15% return rather than 5% it would be easily worthwhile!

Looking at my numbers, private equity including VCTs are about half of all the charges I'm paying, and 3i is the biggest single charge in cash terms. According to HL, 3i has gone from about 200 to 750 over the last 5 years so not too bad, but as they say past performance may not indicate future performance, and as mentioned elsewhere on citywire it is apparently on a huge premium. Alternatively HGT has gone from about 1000 to 1500 in five years, is on a 7% discount and the TER is apparently only 1.7%. In another 5 years we'll know which would be the better investment now ...

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Law Man

Apr 02, 2017 at 14:23

Stephen: I appreciate your correction of my oversimplified analysis.

Foregoing (704-499) = 205 / 499 = 41% is still a lot; but, as said, unavoidable.

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Stephen B.

Apr 02, 2017 at 15:11

It clearly isn't unavoidable in a strict sense - directly-held shares have no charge if you don't trade them, and some ETFs are cheap enough that it's effectively free, e.g. I have an S&P tracker that charges 0.07% pa which is less than 3% even over 40 years. Doing that limits you to large-ish companies quoted in major markets, but that's still many thousands of companies in total. The question is whether the diversification and possible enhanced returns from emerging markets and specialist funds justify the costs, and for what fraction of a portfolio. I don't have a good answer to that, but the funds I invest in do at least in most cases have some evidence of outperformance.

On the opposite side, I bought some Unilever shares in 1995, I've never bought or sold any since, they're now worth about 5 times what I paid and I've had a stream of dividends on top. How many funds have matched that?!

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