Cyclicality can sometimes surprise, despite its inherently repetitive nature. It is odd, for example, to find the world’s largest asset manager emulating a late, unlamented fund house.
Last week, BlackRock announced that $30 billion of its assets under management, 11% of its total active equity assets, would be shifting away from traditional active management towards a quantitative approach.
‘Traditional methods of equity investing are being reshaped by massive advances in technology and data sciences,’ explained Mark Wiseman, global head of active equities at BlackRock.
‘At the same time, client preferences are shifting, focusing not just on outcomes but on how both performance and fees impact value.
‘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,’ he added.
All change please
Wiseman claimed that in embracing quants the firm was ‘revitalizing our active equity capabilities by harnessing the power of human and machine to efficiently and consistently deliver investment performance to our clients.’
The plans will have an immediate price for BlackRock. As well as paying out $25 million during the first quarter of 2017 in severance and accelerated compensation expenses – several managers will be leaving the company as part of the process – BlackRock expects client fees from the affected funds to drop by $30 million a year. Under its new Advantage range of products, expense ratios will fall by between 16 and 81 basis points.
BlackRock believes the pricing and performance of this Advantage suite will ultimately attract inflows to offset the impact on its revenues, but skeptics may be interested in the example of UK asset manager Scottish Widows Investment Partnership (Swip) which made a similar move with mixed results.
In 2012, Swip ushered more than half of its equity fund managers out of the door as it sought to revive its fortunes with quants. At the time, Swip managing director Dean Buckley characterized the move more in terms of risk mitigation than return enhancement.
‘We remain committed to active fund management in those markets where we have confidence that we can generate strong investment performance and build long-term, valuable relationships with clients,’ he remarked. ‘However, for some of our clients, a lower-risk approach to investment is more appropriate for their needs.’
Yet Swip funds continued to feature more prominently in various lists of serial underperformers than in the sales charts.
Swip’s defenders may perhaps insist that the quant migration was interrupted by Aberdeen’s acquisition of the firm in 2013 – at which point Swip ran £52 billion in quantitative equities, worth 40% of its assets under management – so it is unfair to judge it a failure. With the former Swip strategies now all merged away, nobody can know how successful those quant approaches would have been.
BlackRock will of course hope that its own quant conversion registers as more than a footnote in investment history. It has inevitably been cast as evidence of active’s capitulation to passive, but as in Swip’s case that isn’t quite right.
Faith no more
Rather, as Ritholtz Wealth Management chief executive Josh Brown argued at a Citywire’s first US conference last week, it’s a transition from the ‘faith-based’ investing of human stockpickers to something more systematic.
This, he said, was driven by investors’ increasing preference for back-tested approaches and repeatable processes. And it was not confined to retail investors, he noted: quantitative hedge funds like Citadel are proving considerably more appealing than ‘swashbucklers’ in the Pershing Square mould.
These trends were almost certainly more in BlackRock’s thoughts than Swip’s ill-fated quant experiment five years ago.
Its emphasis on lower costs is certainly to be welcomed, especially if BlackRock’s quant team can maintain its impressive record: 90% of their mandates outperformed their respective benchmarks or peer-group median over the five years to the end of 2016.