BlackRock’s latest fee cuts suggest it too is feeling the power of cheap passive strategies, but it hopes to fight back with investments in big data and analytics.
When the world’s largest asset management business is apparently feeling the heat, smaller businesses are bound to be concerned. So the news that BlackRock is about to slash the fees it charges on many of its actively-managed funds is likely to send a shiver down the spines of other active managers.
BlackRock’s move is a response to the seemingly inexorable rise of low-cost passive funds. In the UK alone, passive funds grew 4.5 times faster than their actively-managed counterparts during 2016 according to data compiled for the Financial Times by Morningstar. The reason is simple: increasing numbers of investors simply don’t believe the extra cost of an active fund is justified by the performance it achieves.
Analysts at Credit Suisse put it this way: “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 management fees of 50 to 80 basis points (total fees higher) may need to be adjusted lower to compete effectively with low-cost passive options in the retail channel.”
Credit Suisse also points out that BlackRock’s move is something of a U-turn. After all, just five years ago, it made substantial investments in its asset management professionals, hiring the best performing active managers from rival firms; its thinking then was that aggressively making the case for active management with high-profile names able to point to track records of outperformance would pay off.
This move to lower charges suggests BlackRock now feels that bet was the wrong one to take. It just hasn’t been able to convince investors to look past that time-honoured regulatory caveat, that past performance is no guide to the future. People don’t believe that even managers with the best track records can be trusted to deliver better returns than passive funds; in which case, there’s no sense in paying their higher charges.
Does this mean we’re now in an inexorable race to the bottom on fees, with active funds forced to take their charges ever lower in the face of the passive juggernaut? To some extent it may do, but BlackRock has made another interesting announcement, which might just give active managers cause for hope: it is planning a major new initiative around big data that it hopes could invigorate its active management operation.
It is an idea that has excited asset managers from across the industry for several years now. Their theory is that big data and advanced analytics tools could succeed where human-led active management appears to be failing – collect enough information about a market or asset class and subject it to the right analysis, and the insights you produce just might enable you to beat both competitors and the market.
In one sense, this approach apes the passive approach. Asset managers would effectively be picking stocks by computer, just as passive funds automate the process of buying every stock in their chosen index or market. But data and analytics are about more than just smart technology; they require human direction – the results your computers produce will depend on the quality of the algorithms programmed into them.
This is why asset managers, in common with many other financial services businesses, are now investing heavily in data scientists. If you believe data holds the key to establishing that your investment performance is worth paying extra for, it makes sense to pay for the best people in that field, rather than shelling out for expensive fund managers, no matter how impressive their track record may be.
Herein lies the challenge though. For all the talk about big data and analytics in asset management, these are early days – it’s difficult to find examples of firms already delivering markedly better returns on a consistent basis courtesy of a shift to a more data-driven approach. Those examples may emerge in the months and years to come – from BlackRock, for example – but for now investment in this area is a gamble.
Meanwhile, the passive fund sector, with a model already proven in the minds of many investors, thunders on, hoovering up ever more market share. Active managers hoping to compete through their technologies will have to invest substantial sums to deliver, in both people and technology, while all the time facing pressure to bring their charges down.
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