At BlackRock, Machines Are Rising Over Managers to Pick Stocks

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In Photo: Bank of England Governor Mark Carney (right) listens to chairman and CEO of the US asset management company BlackRock Laurence Fink as they arrive at an international symposium by the Bank de France in Paris on November 7, 2014.

By Landon Thomas Jr.

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 revolutionized 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.

Recently, 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 percent 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 democratization 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 advisers. At least 36 employees connected to the funds are leaving the firm.

While BlackRock is proceeding gradually with its managers, in many ways the new plan is a direct attack on the cult of the brainy mutual fund manager, popularized 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.

Last year, $423 billion left actively managed stock funds and $390 billion 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.

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 percent of total revenue.

According to data from Morningstar, only 11 percent 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.

© 2017 The New York Times

Image Credits: Eric Piermont/Agence France-Presse/Getty Images