Management giant becomes latest to surrender to quantitative push
BlackRock (BLK) Inc. (BLK)'s plans to reorganize its active equity investment platform and rely more on lower-priced strategies based on quantitative computer models is another sign the money management industry is relying more on technology to serve clients and protect profits.
The New York-based giant isn't alone.
Asset managers such as J.P. Morgan Asset Management (JPM), ClearBridge Investments LLC, Acadian Asset Management LLC, and Legg Mason (LM) Inc. (LM), to name a few, are investing in technological capabilities to reduce fees, grow their assets, identify new market opportunities, run operations more efficiently, better manage data and handle clients' increasingly complex needs.
“Traditional methods of equity investing are being reshaped by massive advances in technology and data sciences. At the same time, client preferences are shifting, focusing not just on outcomes but on how both performance and fees impact value,” said Mark Wiseman, BlackRock's global head of active equities in a March 28 news release announcing the reorganization.
Added Mr. Wiseman: “The active equity industry needs to change. 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.”
For BlackRock, with $5.1 trillion in total AUM, the move should also help it address ongoing problems generating alpha in its equity funds in recent years. Data from Morningstar Direct reviewed by Pensions & Investments show that BlackRock's average excess return for its equity funds is below its peers on a three- and five-year basis.
According to Morningstar, the average excess return of BlackRock's institutional class active equity mutual funds was -1.43% for the three years ended Dec. 31, vs. an average excess return of -0.76% for its active equity manager peers. Its five-year excess return was -0.99%, vs. -0.29% for its peers.
BlackRock is restructuring its active equity strategies into four areas: core alpha (including its new Advantage series), high-conviction alpha, outcome-oriented and country/sector specific.
It's also lowering fees across several strategies, increasing the role that quantitative research will play in its investment process and reducing its active equity team by a few dozen people.
BlackRock is investing further in data science innovation by leveraging capabilities of its end-to-end investment and risk management operating system, Aladdin, to distill vast stores of data into investible insights for both quantitative and fundamental investors.
It's a race
Jeff Margolis, founding partner of money management consultant Margolis Advisory Group Inc., said there's a technology race going on in the asset management industry, and “many money managers need to scramble to catch up.”
Many quantitative firms and larger successful hedge funds already seem to have a competitive edge and understand the importance of investing in technology, he said. “Traditional firms have a lot of catching up to do. Traditional active large-cap investing is becoming a dinosaur.”
At BlackRock (BLK)'s Jan. 13 quarterly earnings call, Chairman and CEO Laurence D. Fink told investors that “the key to designing and delivering a robust solution that targets specific outcomes for our clients is technology, which has always been at BlackRock's core. We see strong and growing demand for BlackRock's technology offerings.”
Mr. Fink added: “More and more asset managers, asset owners ... (and) insurance companies are valuing the differentiating ability of our Aladdin platform and other technology offerings at BlackRock, to help them achieve their goals. We are constantly enhancing our existing technology as well as coming up with new ways to use Aladdin to serve our clients.”
Roughly $30 billion of BlackRock's assets under management — or 11% of its active equity business — will be affected by strategy or portfolio management changes. No changes will be made to the firm's active equity funds managed outside of the U.S.
The launch of BlackRock's new Advantage core alpha series, which consists of nine mutual funds and an expanded range of income-generating strategies, includes $8 billion of AUM, with pricing adjustments that will reduce the management fees by $30 million annualized as well.
A March 29 report by Credit Suisse Group suggested changes within BlackRock “reflect a lower confidence in the ability of human stock-picking in large-cap U.S. equities.”
“ BlackRock's trying to increase the probability that their active products will outperform after fees, and they think they can generate greater alpha with a larger quantitative input,” said Craig W. Siegenthaler, managing director and equity research analyst at New York-based Credit Suisse and lead author of the report.
Several industry experts stressed the critical role technology now plays in the money management industry. “Given all the pressure on margins, the importance of technology is major for any player in the industry,” said Raj Bector, a partner at McKinsey & Co. “It's about staying in business.”
In the industry as a whole, Mr. Bector pointed out that analytics and reducing trading costs are “just a couple of examples where technology is playing a pivotal role in the investment manager space.”
Ju-Hon Kwek, also a partner at McKinsey & Co, added: “It's a "Tale of Two Cities.' Several managers have been incredibly forward-leaning and have looked at technology and are actively out there doing pilots and experiments. Others have been very hesitant to make the leap to transform the model.”
Mr. Kwek noted that technology is being used to run the investment management business while also transforming it, or to improve products while improving internal efficiencies. He pointed out that money managers are offering increasingly complex investment vehicles such as multiasset class solutions, liquid assets and exchange-traded funds. Those bring with them new challenges that require increased internal technological capabilities.
Looking forward at the role technology will play in remaining competitive, Virgilio “Bo” Abesamis III, executive vice president at Callan Associates Inc., and manager of the firm's trust, custody and securities lending group in San Francisco, said as the industry continues to move toward a real-time investment environment, managers “must cut the umbilical cord on anything that's manual.”
Michael S. Falk, a consultant to money managers and a partner with Focus Consulting Group in Chicago, said that as artificial intelligence machine-learning develops, the classic job of an investment analyst will be threatened. “That doesn't mean that (investment analysts are) all going to be gone. But they'll be more threatened if (managers) have better forms of machine learning.”
Mr. Falk warned that, depending on the extent of the capabilities, investing in technology can get quite pricey. So, he suggests that renting rather than owning machine learning solutions could be a cheaper and more effective solution.
Then, when it comes to the costs of technology investments versus the costs of salary and bonuses for staff, the question of whose roles would be replaceable becomes a crucial one for managers.
Mr. Falk believes that while the role of analyst could be in jeopardy, portfolio managers are safe “for a little longer. We do need human decision-making,” he added.
This article originally appeared in the April 3, 2017 print issue as, "BlackRock puts more of its future in tech".