Investing: BlackRock bets on robot stock pickers
“Score one for the machines,” said Landon Thomas Jr. in The New York Times. BlackRock, the world’s largest money manager, with some $5 trillion in assets, is shifting away from human stock pickers in favor of computer models that use complex algorithms to make investing decisions. The firm is taking baby steps, initially shifting a relatively small $30 billion in funds to the machine-led system. But it’s perhaps the biggest attack yet “on the cult of the brainy mutual fund manager.” In recent years, investors have increasingly fled actively managed funds, which charge hefty fees for the expertise of their handsomely paid portfolio managers, and turned instead to low-cost, passive options that simply track the market’s performance. Not only are these funds cheaper, they’ve also been leaving human stock pickers “in the dust.” Since 2009, only 11 percent of BlackRock’s actively managed stock funds have beaten their market benchmarks.
BlackRock is hoping that “relying more on robots” will be a hit with cost-conscious customers, said Sarah Krouse in The Wall Street Journal. One selling point is that the rebranded unit will begin offering Main Street customers computer-driven investment strategies that were “previously available only to large institutional investors.” The revamped funds will also charge considerably lower fees than BlackRock’s active funds have in the past—which BlackRock admits will eat into its bottom line. BlackRock says it initially expects to lose $30 million annually from the planned price cuts.
The reality is that BlackRock is “giving in to market forces,” said Rachael Levy in BusinessInsider.com. Last year alone, global investors pulled $423 billion from actively managed stock funds and poured $390 billion into index funds. To stay competitive, active managers have been trying to keep their fees as low as possible while tapping into new technologies to improve their chances of beating the market. Hedge funds especially have been making use of so-called alternative data for guidance on which stocks to buy. Rather than just looking at a company’s balance sheet, they are beginning to tap “data that comes from the apps we use, the online shops we buy from, and the GPS tracking within our smartphones”—anything that gives them more insight into “which companies will continue to rake in cash, and which ones are likely to flop.”
“You may benefit from BlackRock’s move even if you aren’t a client,” said Tom Anderson in CNBC.com. BlackRock’s embrace of low-fee funds should prompt other firms to bring down their fees as well, which benefits everyone except high-flying portfolio managers. Alas, human stock pickers now find themselves in the same hot seat as taxi drivers and truckers, whose livelihoods are being threatened by self-driving technology. Automation “just hit asset management people who make half a million dollars a year,” said Laura Varas, founder and C EO of financial research firm Hearts & Wallets. “What BlackRock is doing is huge, and there will be more to come.”