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BlackRock replaces people with machines in revamp of stock unit

LiveMint logoLiveMint 29-03-2017 Sabrina Willmer

Boston: BlackRock Inc., after years of sluggish gains by its traditional stock pickers, is upping its bets on quants.

The world’s largest money manager is firing more than 30 people in its active-equities group, including five of its 53 fundamental portfolio managers, according to a person familiar with the matter. The revamp moves $6 billion of the $201 billion run by traditional stock pickers into cheaper funds where quants play a role, the person said.

Chief executive officer Laurence D. Fink’s shift to quantitative strategies follows similar moves by hedge funds seeking a high-tech fix to their investment woes. Fink, who has re-jiggered his stock picking unit several times in recent years, now sees computer models and data science as the future of active-equity management. His move is driven by clients who are flocking to cheaper index-tracking exchange-traded funds, which benefits BlackRock’s ETF business while hurting its active managers.

“There is fee compression in the US, which is being driven by technological advances and by the successful and continued growth of ETFs,” Mark Wiseman, BlackRock’s global head of active equities, said in an interview. “We are in a regulatory environment that is pushing hard on the traditional active-equity model. We want to play offence, not defence.”

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Pete Stournaras, who managed at least $6 billion mostly through large cap funds, is among the departing fund managers, the person said. Quants will now have a hand in at least six of his funds. Bart Geer, who oversees at least $4 billion on the basic value team, will step down from those funds and become a senior adviser. Thomas Callan, who helps manage at least $7 billion, will also become an adviser. Phone calls to the managers were not immediately returned.

Fee cuts

BlackRock, which manages $5.1 trillion, is shifting money from its stock-picking business into a new Advantage series run by the $74 billion quant group. Advantage is expected to include nine mutual funds for US investors that will produce returns with less risk, the company said. Fee reductions on $6 billion in assets range from about 19% to 56%.

“We can more efficiently deliver alpha at a better cost with automated processes,” Wiseman said.

The New York-based firm is also moving assets from active-equity funds to an income series that produces higher dividend yields, with $2 billion impacted by fee cuts of as much as 21%, the person said. Two other groups of funds—one that will make higher risk, concentrated bets and another focusing on specific countries and sectors—round out the reorganization.

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The layoffs in the active-equity unit, which has more than 400 employees, will contribute to a $25 million charge for the first quarter, the company said. The firm hired Doug Chow, a former portfolio manager at Fidelity Investments, to run an integration and data platform. He starts in April.

Lackluster performance

The company’s active-equity funds have lagged behind rivals for years. The funds’ annual average return is 4% and 7.3% over three and five years, according to data from Morningstar Inc. This compares with the industry average of 5.3% and 8.8%.

In 2012, BlackRock set out on a five-year plan to boost performance by hiring top stock pickers and adding analysts and other support staff to investment teams. Fink said in 2014 that he’d spent “hundreds of millions of dollars rebooting” the business. The firm has also changed the leadership structure of the active business several times in the past four years.

In September, BlackRock brought in Wiseman, the former head of the Canada Pension Plan Investment Board, to run the quantitative and stock group, which were combined early last year. Wiseman arrived during a tough 2016 for the quant group, which contributed to BlackRock’s first annual decline in revenue since 2009.

Hiring researchers

Four of BlackRock’s quant hedge funds posted the worst annual returns in their history last year. BlackRock says its quant offerings on average have beaten 43% of their benchmarks or a peer-group median over the past year, and 91% in the past five years.

BlackRock’s active-equity funds saw $20 billion in net outflows last year, according to a regulatory filing. Meanwhile, the firm’s ETF business has been booming, with record inflows last year.

Wiseman said his group plans over the next 18 months to hire about the same number of employees who were laid off. BlackRock is looking for people with deep research capabilities, technological and data analytics skills, and will put more emphasis on hiring in the emerging markets, especially Asia.

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