BlackRock (BLK) Inc. (BLK) senior officials replaced portfolio managers on 80% of the firm's active equity teams in the past 18 months, and it's clear they won't hesitate to ax others whose performance is subpar.
The aim of the world's largest money manager: fix a sagging equities franchise that has seen large net outflows and has hurt revenue.
The changes have not been limited to portfolio managers, sources said. In some cases entire teams including research analysts have been replaced.
But analysts and consultants say even if the new blood can reverse the poor performance, it could take several years at the minimum to regain the confidence of investors who have been pulling their money out of the firm's active equity strategies.
Net outflows continue to plague BlackRock's active equity portfolios: $20.5 billion in the 12 months through March 31, with $5.6 billion in the last quarter alone. Much of the net outflows in that quarter were from two big undisclosed institutional clients, BlackRock officials said.
While active equity makes up only $291.7 billion, or 7%, of BlackRock's $3.9 trillion in assets under management, it plays a major role in the company's revenue because of the higher fees it generates over BlackRock's passive index strategies. Revenue from active equities made up a significant 20.3% of total base fees the firm collected in the first quarter, down 80 basis points from the previous quarter and 260 basis points from the year-earlier quarter, according to BlackRock data.
The asset decline comes as many BlackRock (BLK) active equity strategies continue to have performance challenges. Some 32% of the strategies underperformed for the year ended March 31, 39% for the three-year period and 43% for the five years, BlackRock data show.
BlackRock Chairman and CEO Laurence D. Fink acknowledged the problem at a New York investment conference last month, saying the company's active equity franchise was a “work in progress” and BlackRock was spending tens of millions of dollars to replace teams and increase performance.
Mr. Fink said most of the new teams are performing better, but he acknowledged the biggest equity risk the company has now is a more immediate turnaround in investor demand for active equity strategies.
“I'm going to miss that, because I don't have a three-year track record in a lot of this stuff,” he said, according to a transcript.
In late April, during the company's first-quarter earnings call, Mr. Fink had said that replacing portfolio managers was “costly in the short run” because it caused investors to pull their money. “These are the costs and this is why so many firms are afraid of changing managers, even with mediocre performance,” Mr. Fink said during the call. “And we made a conclusion last year that we are going to rebuild for the future. We're going to spend the money in recruiting great teams and we're going to take the short-term hits in terms of potential outflows.”
Key changes in the top leadership of BlackRock active equity teams have occurred in emerging markets, flexible equities, basic value and fundamental large-cap growth and large-cap series teams.
The latest change came last week when Jean Rosenbaum, a managing director and portfolio manager on the global opportunities equity team, was terminated. Ms. Rosenbaum was one of several portfolio managers on two strategies managed by the team — U.S. opportunities, and science and technology opportunities — and a strategist for all of the team's retail and institutional offerings.
Ms. Rosenbaum was replaced on the science and technologies opportunity strategy by portfolio manager Tony Kim. Mr. Kim had been a senior research analyst at Artisan Partners LP.
The global opportunities team already had a shakeup when Michael D. Carey, a managing director and portfolio manager for the international small-cap equity portfolios and a strategist for all of the team's products, was forced to leave in June 2012. Nigel Hart, a managing partner and portfolio manager at ReachCapital Management LP, was named managing director and product manager for global and international equity portfolios for the team.
More portfolio managers and teams could be on the chopping block, BlackRock officials have said.
Put it bluntly
In February, BlackRock (BLK) President Robert Kapito put it bluntly. Speaking at a Credit Suisse Investment Conference in Miami, Mr. Kapito reportedly said: “I will have less patience going forward with underperforming active products, and we will look to replace those teams quicker than we have replaced them in the past.”
Mr. Kapito has said a three-year slump would be sufficient cause for action ranging from a close review of personnel, process and performance to outright replacement.
BlackRock spokesman Brian Beades refused to discuss the issue of manager replacements and said neither Mr. Fink nor Mr. Kapito would be available for comment.
Geoffrey Bobroff, president and founder of Bobroff Consulting in East Greenwich, R.I., said BlackRock has yet to show investors that it can produce steady, solid returns for its active equity business, which grew through acquisition, rather than organic growth.
“They have to establish to the markets that they can deliver high-quality equity returns,” he said.
Analyst Robert Lee of Keefe, Bruyette & Woods Inc., New York, said BlackRock seems to be doing the right thing by making portfolio management changes to improve performance. But making those changes is sometimes an art more than a science and could have the potential to backfire, he said.
“You don't want to be getting into the scenarios where investment teams feel like if they don't perform in the short term that they will be on the pavement,” Mr. Lee said.
The changes might make it hard for BlackRock (BLK) to encourage a strong investment culture, agreed Dan Culloton, associate director of fund analysis, at Morningstar Inc., Chicago. “It's hard to maintain and nurture a consistent investment culture with this much change,” he said.
Mr. Culloton said BlackRock has added some experienced managers to its new lineup, such as Lawrence Kemp, who was named in December as the chief of the fundamental large-cap growth team. Kemp. Prior to joining BlackRock, Mr. Kemp managed the Laudus Growth Investors Fund and large-cap growth institutional strategies at UBS Global Asset Management.
But Mr. Culloton said it can't be assumed that the managers' successful track records will carry to the new firm. “The clock starts over,” he said.
He said BlackRock's ambitions to increase its overall business shows the tension the firm faces between serving clients and shareholders, as nearly all asset managers do.
He said BlackRock's rapid growth and strong corporate execution, for example, have set high expectations for shareholders who have come to expect industry-leading 40% margins, consistent dividend growth and annualized total returns of more than 25% since the company went public in 1999.
This article originally appeared in the June 10, 2013 print issue as, "BlackRock dumps equity managers".