At BlackRock, machines rising over managers to pick stocks

Score one for the machines. The largest fund company in the world, BlackRock, has faced a thorny challenge since it acquired the exchange-traded-fund business from Barclays in 2009.

 

These low-cost, computer-driven funds have exploded in growth, leaving in the dust the stock pickers who had spurred an earlier expansion for the firm. The rise of passive investing — exchange-traded funds, index funds and the like — has revolutionised the investment world, providing Main Street investors with greater opportunities at lower fees while putting pressure on even Wall Street’s biggest money managers.

 

Now, after years of deliberations, Laurence D Fink, a founder and chief executive of BlackRock, has cast his lot with the machines.

 

On Tuesday, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

 

The initiative is the most explicit action by a major fund management firm in reaction to the exodus of investors from actively managed stock funds to cheaper funds that track every variety of index and investment theme.

 

Some $30 billion in assets (about 11 per cent of active equity funds) will be targeted, with $6 billion rebranded BlackRock Advantage funds. These funds focus on quantitative and other strategies that adopt a more rules-based approach to investing.

 

“The democratisation of information has made it much harder for active management,” Fink said in an interview. “We have to change the ecosystem — that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies.”

 

As part of the restructuring, seven of BlackRock’s 53 stock pickers are expected to step down from their funds. Several of the money managers will stay on as advisors. At least 36 employees connected to the funds are leaving the firm.

 

While BlackRock is proceeding gradually, in many ways the new plan is a direct attack on the cult of the brainy mutual fund manager, popularised in the 1980s and 1990s by Peter Lynch, a stock-picking wizard at the fund giant Fidelity.

 

Today, asset managers like Pimco, Franklin Templeton, Aberdeen and, of course, Fidelity continue to make the case that their bond and equity managers can outsmart the broader market — and charge a premium price for doing so.

 

Since 2009, however, as the performance of these funds has suffered, millions of investors have rejected this proposition, abandoning their expensive mutual funds for better-performing funds that track various indexes at a fraction of the cost.

 

Now the biggest fund companies are Vanguard, the indexing pioneer, and BlackRock, which together oversee close to $10 trillion in assets.

 

BlackRock, with its fleet of iShares ETFs, has certainly benefited from the investor revolution — one that threatens to disrupt the mutual fund industry in the years ahead.

 

Still, the monster in the mutual fund room by far has been Vanguard, which, via index funds and exchange-traded funds, has had historic inflows.

 © 2017 New York Times News Service