BlackRock, the world's largest investor, just shook up its business, slashing fees on some funds and saying it will increasingly turn to computing power to drive investing decisions.
In doing so, the fund manager is tapping into several major trends in the professional stock picking business - as investors come under pressure to justify their fees and technology increasingly helps drive decision-making.
Among the shifts that the $5.1 trillion investor announced late Tuesday:
- It is cutting $30 million in fees on some of its actively managed funds.
- It will use more data science, which it says "strengthens the connections that quantitative and fundamental investors both need." It will also add nine quant strategy mutual funds and phase out some traditional stock picking funds.
Bye bye, big fees
Active managers - or portfolio managers who research and choose investments - have been under pressure to cut their fees in large part because of the rise of passive investing, which entails doing nothing more than tracking a market index. It isn't universal, of course: stock pickers who have track records of beating the market over the long term are holding out, but with this move BlackRock is giving in to market forces, Credit Suisse said in research note.
"These changes reflect a lower confidence in the ability of human stock picking in large cap US equities, and also signal that the value proposition for US active equity funds with mgmt fees of 50-80bps (total fees higher) may need to be adjusted lower to compete effectively with low-cost passive options in the retail channel."
Credit Suisse also noted that BlackRock now has less confidence in a business move it made five years ago. In 2012, BlackRock replaced about 80% of its investment staff, "hiring top performing active equity managers from competing firms with strong track records," the bank's analysts wrote.
Today, BlackRock is less optimistic that active managers will "consistently outperform passive after accounting for the higher fee levels," according to the bank. "Historical data has now proven that the average [portfolio manager]'s performance is cyclical, and hiring the top performers over the last five years may not likely lead to strong performance over the next five."
REUTERS/Tim Shaffer
Vanguard's Bogle.
"We're paying people to beat the market when they aren't doing it, and when you think about it, that doesn't make sense," Bogle said at the time.
Data and quants
BlackRock's said last year that it was hoping the data would help its ailing stock-picking unit. That said, BlackRock said Tuesday it is planning to integrate the data it collects globally and share it with every active investment team. It's also planning to roll out nine new mutual funds managed by its quantitative investment team. Those strategies rely on algorithms to beat markets rather than fundamental, human led stock picking.
Active managers across the board have been trying to tap into the best data scientists and get their hands on the latest, most differentiated data to improve their chances of beating markets and their competitors. Hedge funds in particular have been tapping into so-called alternative data - data that comes from the apps we use, the online shops we buy from, and the GPS tracking within our smartphones, for instance. This info helps investors figure out where to put their money and can give insight into how stocks will perform - which companies will continue to rake in cash, and which ones are likely to flop.
Dan Loeb, one of the hedge fund industry's most famous stock pickers, touched on this trend in a recent investor letter, too. Loeb cited parsing enormous data sets as "increasingly important to remain competitive while investing in single-name equities."