US fund giant will use machines, not humans, to pick stocks

The world’s largest fund manager, BlackRock, is placing its trust in algorithms

Laurence Fink, BlackRock chief executive: “The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy . . . that does not work anymore.” Photograph: The New York Times

Laurence Fink, BlackRock chief executive: “The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy . . . that does not work anymore.” Photograph: The New York Times

 

Score one for the machines. From the moment Laurence Fink, the chief executive of BlackRock, created the largest fund company in the world by snapping up the exchange-traded fund business from Barclays in 2009, he has faced a thorny challenge. The explosive growth of these low-cost, computer-driven funds has been leaving in the dust his firm’s old-school stock pickers, and investors have been fleeing in droves.

After years of deliberations, Fink has opted for the promise of the machine. This week, 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.

Some $30 billion (€28 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.

As part of the restructuring, seven of the firm’s 53 stock pickers are expected to step down from their funds. Dozens more are expected to leave the firm. 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.

“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.”

Investor revolution

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 has been the indexing giant Vanguard which, via its index funds and exchange-traded funds, has had historic inflows.

Last year, for example, $423 billion left actively managed stock funds and $390 poured into index funds, according to Morningstar. Of that amount, Vanguard captured $277 billion, nearly tripling the amount that went to its nearest rival, BlackRock.

Fink has always professed to be agnostic as to whether a client bought a no-frills exchange-traded fund tracking low volatility stocks or an expensive mutual fund investing in small US companies. Let the client choose has long been the BlackRock leader’s mantra. Left unsaid, however, has been the reality that at his root Fink is now a true believer in systematic investing styles that favour algorithms, science and data-reliant models over the stock-picking smarts of individual portfolio managers.

In recent years he has hired Andrew Ang, a star finance professor from Columbia, to push BlackRock into factor-based investing, a theme-based approach to allocating assets. And since last year, BlackRock’s dyed-in-the-wool stock pickers have worked in the same division as its quants. Called scientific equity, these managers, many boasting PhDs, might buy (or sell) Wal-Mart’s stock on the basis of a satellite feed that reveals how many cars are in its parking lots as opposed to an insight gleaned from the innards of the retailer’s balance sheet.

Power of machines

In sum, Fink has become convinced that BlackRock must bet big on the power of machines, be it Aladdin, the firm’s risk-management platform, robo-advisers, big data or even artificial intelligence. Just about any interview or conference call featuring Fink bears this out: invariably, the conversation comes around to technology, with scant mention of what the firm’s stock pickers are doing. But simply going all in on machine-driven passive investing over active has not been an option for Fink. While the assets of the firm’s actively managed stock funds have shrunk to $201 billion today from $208 billion in 2009, the business is still very profitable for BlackRock, representing 16 per cent of total revenue.

According to data from Morningstar, only 11 per cent of Blackrock’s actively managed equity funds have beaten their benchmarks since 2009. Since 2012, $27.5 billion has left BlackRock actively managed mutual funds, per Morningstar data. The new push, which is being overseen by Mark Wiseman, a top executive at Canada’s top pension fund whom Fink hired last year to revamp his equity business, highlights strategies in which a portfolio manager makes big bets on a select group of stocks.

Still, there is no mistaking the larger message: expensive, actively managed funds looking to make a mark picking US stocks must adapt to the new realities at BlackRock. Take BlackRock’s Large Cap Core fund, which invests in big US companies. Since 2009, the fund’s assets have halved, to $1.5 billion, lagging the index by 1.3 per cent over the last three years. The fund’s lead manager will be replaced by three portfolio experts from BlackRock’s quantitative investing team, where all varieties of computer models are crunched in pursuit of stock picking ideas.

Fees

Fees will also be halved. Of course, none of these moves are likely to immediately halt the outflows of the past years. In fact outflows are likely to increase, as few investors want to stick with a fund undergoing an existential makeover. But as Fink and his new equity deputy see it, it is better to take the pain now than later.

“The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy . . . that does not work anymore,” Wiseman said. “These are stormy seas for active managers, but we at BlackRock are an aircraft carrier, and we are going to chart our way through these seas.”

- New York Times Service

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