BlackRock head of EMEA retail Michael Gruener believes the ‘active-vs-passive’ debate is now outdated, with both approaches deserving their place in investment portfolios. Speaking to Kurtosys, he foresees the proliferation of thematic investing, describes how embracing technology is absolutely crucial for asset managers to remain competitive, and recognises the importance of ethical credentials when speaking to the next generation of investors.
We see megatrends becoming more prevalent in asset management. Following the success of the thematic funds offered by iShares, BlackRock launched a range of actively managed thematic funds earlier this year. Why are themes becoming so important?
We sit in a world where client portfolios are increasingly built using active and passive funds, with an increasing proportion of client portfolios becoming passive. I used to run sales at iShares [as co-head of EMEA sales] and am now on the active side at BlackRock, and I’m speaking to the same clients.
Many European private banks today have passive exposure as high as 35%, in the US, it could be as high as 50%. Yet we acknowledge that passives do not always have fantastic stories that will fully resonate with the end investor. We can talk about index construction and rules, but these do not always cut through.
It is also very important for the adviser to sell with conviction and tell stories in accordance with their clients’ beliefs, and the stories we are talking about are artificial intelligence, cybersecurity, big data, demographic change, urbanisation, the future of healthcare…
I was asked recently, what is this thematic investing all about? I showed an image of 5th Avenue in New York in 1900, full of horse carts. There was one car on the whole street and you could barely see it. In 1913, 5th Avenue was full of cars, with only one horse and cart left. That is the idea of thematic investing – looking at a trend that you believe has legs over a full investment cycle, legs that can change the world. That’s what we are trying to do.
Do you believe we will reach a point where “thematic investing” just becomes “investing”, that is will no longer be a standalone segment of the market?
Yes, I do. I believe if you take a longer-term view, the old-school, long-only, index-plus 3% tracking-error type of investing, looking solely at the Global Industry Classification Standard (GICS) sectors is just not as valid anymore. You can’t really categorise a sector as simply “European” because the sectors themselves are so diverse; the companies are doing all kinds of things, some are tech, some are not. It does not help express what the end investor wants. Therefore, with a 5-10 year view I truly believe thematic investing is going to be bigger than the traditional sector investing we have seen to date.
You have a division within BlackRock that uses data science to help underpin your investment strategies, the Systematic Active Equity (SAE) team. With the enormous growth of data, how does one extrapolate something from that that actually has meaning?
The sheer amount of accessible data we have is incredible. To give context, just today at 3pm, mankind will have generated more data than all of mankind from its existence to the year 2000. In a single day. We hear all sorts of things about terabytes but they are hard concepts to grasp, or picture.
Added to that, the computing power we have today is unlike ever before. Our machines are so much faster in analysing unstructured data and they are getting faster and better every day, every six months, every year.
Bring these two things together – the data and machines and then by employing very, very smart researchers which we – and other companies – do, you are trying to find signals to extract knowledge out of it all.
Data in itself is not knowledge, you have to have the brains to dig into it.
Increasingly it’s not only about public data. For example, BlackRock’s SAE investing team receives every single Twitter feed in the world every millisecond – that is all public data. But there are non-public data sources, such as satellite feeds over Russia that indicate whether the harvest is good, or in the American Midwest, showing how long the queue outside the Apple store is, therefore whether people are buying the new iPhone.
But, ultimately, we are an investment manager and our mission is to generate alpha for our clients. We are still trying to meet the same purpose, which is generating returns for our clients but the tools we use to do that are very different than they were five or 10 years ago.
That’s the one side of tech, from an investment standpoint. How else is technology being used differently within the business?
The other side is about bringing products to the end client in a more efficient way. I, like most people, don’t like to go into a bank unless I have to. If it’s 8pm, I want to have dinner with my wife, sit on my couch and then perhaps go about my banking. And I’m not dissimilar to most people. So, I believe the rise of digital advice – I don’t like the term ‘robo-advice’ – is set to be huge.
Morgan Stanley recently predicted digitally advised client money would reach $3trn in Europe and another $3trn in the US, by 2023 – in five years. This is huge and is the way our clients want to engage, more and more.
Our two major investments in technology have been in (proprietary risk management system) Aladdin for Wealth and acquiring a stake in (robo-advice firm) Scalable Capital, which even in the past 18 months has delivered mind-blowing results, in my opinion.
What can we expect to see next from BlackRock, with regard to tech developments?
We will keep rolling out [our digital adviser] Scalable to our largest distributors. I believe you will see more tier one retail banks adopt its use. Many of these players want to use the tools but don’t want to build it themselves so will increasingly look at partnering with technology either from BlackRock or someone else and roll out into their systems.
I think that is the right way of doing it; I never believed a standalone tech company would be able to succeed in this market because of the high cost of client acquisition.
We are interested in big networks, with large client banks, who are asking how they cater to the saving and retirement needs of those millions of people in an efficient way. I think it is going to be big business in Europe, but only for a handful of players, who are able to succeed as external technology providers in that space.
Moving away from digital advice, as more than 95% of our business is intermediated and around 95% of financial products in Europe are sold by advisers, we are engaging with our adviser base and looking at client-enabling technology.
How do we make the adviser better, how do we bring better tools to help them sit down and explain what would happen to their client’s portfolio if 2009 repeated itself, what happens if we add a certain exposure, or how much are you prepared to lose in a worst-case scenario? We can help with those narratives and demonstrate risk management.
We have developed Aladdin Risk for Wealth Management and will be rolling out these tools to our adviser base.
Technology aside, what else is BlackRock doing to adapt the way that it addresses the needs of the future generation of investors?
Tech is certainly one big construct but the other is ESG (environmental, social and governance). Even a couple of years ago I would have said there was a lot of talk about ESG from a PR perspective but not much real client interest.
That has changed completely. We have hired teams, we are launching investment strategies, we are changing our overall investment processes to integrate ESG thinking into all of our portfolios. It is now a huge effort within BlackRock.
Every one of my clients wants to talk about ESG; what are we doing, how are we looking at the world, how are we integrating our criteria into our overall investment processes.
That is the other big area of development we are addressing but it is a journey; we are not there yet. We believe anyone else is either though, other groups, nor the regulators, but we are all getting there, which I think is a good thing.
Since becoming freelance in 2013 she has worked across a number of trade and consumer-facing publications including The Telegraph, Independent, Trustnet, Portfolio Adviser, Money Marketing, Fund Strategy, Investment Week and Investment Adviser, as well working directly for a number of wealth and asset management businesses and technology firms as a copywriter and content producer.
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