BlackRock Still Searching for an Active Equity Edge
Despite leaning more on quants in its latest restructuring, BlackRock hasn't abandoned hope for fundamental stock-picking.
BlackRock's active equity mutual funds haven't exactly inspired envy since the last time it tried to reboot the lineup with an injection of new investment talent in 2012. Through March 2017, about half of its stock funds trailed their Morningstar Category averages over the trailing five years, and three fourths lagged their prospectus benchmark indexes.
Executives at the world's largest money manager also haven't hid the fact that they wouldn't wait forever for the turnaround to bear fruit. "This is not a college," BlackRock president Rob Kapito told Morningstar in 2013. "Tenured professors don't exist."
So, while it was not a shock when the firm's new global head of active equities, Mark Wiseman, announced it was letting go of at least seven portfolio managers as part of its latest attempt to boost its struggling active equity lineup, the news still triggered big tremors. Observers and BlackRock executives themselves have portrayed the decision to move 11% of its retail and institutional active stock assets from traditional stock-pickers to quantitative teams as a sign of the increasingly desperate times for active management.
It is that, but the revamp also says a lot about BlackRock. Despite its vast resources, the firm has repeatedly whiffed on active equity management but is determined to keep swinging. Recently, it also has been more willing to waive and cut fees. The fund realignments come with fee cuts that will amount to an estimated $30 million revenue loss (it slashed fixed-income fund expenses, too, in 2016). Time will tell if this reorganization fares better than the last one, but here are some initial takeaways.
Rise of the Machines
BlackRock’s San Francisco-based Scientific Active Equity group will take control of seven funds that had employed fundamental or a mix of fundamental and quantitative processes. SAE will turn those offerings into pure quantitative, or computer-aided, funds and give them a new “Advantage” brand. The restructured, rechristened, and repriced funds, and some offerings SAE already manages, will be the centerpieces of what BlackRock is calling its “Core Alpha” product range.
The playbook is not new. This arrangement resembles iShares’ Core ETF series, which has been popular since BlackRock launched it five years ago. BlackRock’s affinity for quantitative methods isn’t recent either. The firm has long touted technology as one of its core competencies; its Aladdin risk- and portfolio-management system has been part of the company’s central nervous system since its founding. Since acquiring the group as part of its purchase of Barclays Global Investors and iShares in 2009, BlackRock has invested in SAE, and chairman and CEO Larry Fink has touted its record, capabilities, and innovations in numerous interviews and conference calls. So, it has been easy to see the rise of SAE coming.
Some of the funds handed to SAE were surprises, though. BlackRock Global SmallCap (MAGCX) and BlackRock Value Opportunities (MASPX), which bottom-up managers Murali Balaraman and John Coyle have run since 2005 and 2009, respectively, will become cheaper, but much different, offerings. BlackRock Global SmallCap will become BlackRock Advantage Global, an all-world, all-cap offering benchmarked to the MSCI ACWI Index; BlackRock Value Opportunities will become BlackRock Advantage Total Market, a core stock fund measuring itself against the Russell 3000. Their expense ratios will drop by 36 and 60 basis points, or hundredths of a percent, respectively. BlackRock Global Opportunities (BROAX), a bottom-up world-stock fund with a Morningstar Analyst Rating of Neutral and run by a large Philadelphia-based team of managers and analysts since 2006, will become BlackRock Advantage International, a quant fund that tries to beat the MSCI EAFE Index and charges 42 basis points less. And BlackRock Flexible Equity (BMCAX), once touted as a concentrated, high active share fund but run as a benchmark-conscious core vehicle since 2015, is now BlackRock Advantage Large Cap Growth, with a 35-basis-points fee cut.
SAE’s takeover of BlackRock’s Large Cap Series is its least surprising new assignment. These funds had put up desultory long-term results with a mix of quantitative screens and fundamental research that produced benchmark-hugging portfolios. They were neither fully quant nor fundamental; SAE will add Advantage to BlackRock Large Cap Core’s (MDLRX) and BlackRock Large Cap Value’s (MDLVX) names, make them committed quant funds, and charge about 40 basis points less.
BlackRock’s quants did not escape chastisement of sorts. SAE will continue to run the Neutral-rated BlackRock Emerging Markets Long/Short (BLSAX), but it will drop the shorting part of its strategy and its fees by 81 basis points, add Advantage to its name, and become a long-only emerging-markets equity fund. BlackRock Emerging Markets Long/Short trailed more than 80% of the market-neutral Morningstar Category in the trailing five-year period ended in February.
They'll Be Back
While BlackRock has raised the profile of its quants and sent seven traditional active portfolio managers packing, it has not given up on fundamental managers. Indeed, the firm added resources and new funds to bottom-up-driven teams that it concluded were unique enough to outperform over time. BlackRock is calling these offering ranges high conviction alpha, outcome oriented, and country and sector funds.
The squads running the firm’s largest stock fund, BlackRock Equity Dividend (MADVX), not only survived the reorganization but the Bronze-rated fund also gained personnel and mandates. BlackRock Equity Dividend lead manager Tony DeSpirito, who is taking this fund over as veteran Bob Shearer eases into a previously announced retirement this year, will head a new “income and value” team. The BlackRock Equity Dividend team will shed three members but expand to 14 from about 10 people as it absorbs analysts and managers from other restructured funds, such as the BlackRock Large Cap Series and BlackRock Basic Value (MABAX). DeSpirito’s income and value team also will take over BlackRock Mid Cap Value Opportunities (MRRFX) and BlackRock US Opportunities (BMEAX), both Neutral-rated, and transform them into new animals: BlackRock Mid Cap Dividend and BlackRock High Equity Income, respectively. It remains to be seen if melding formerly independent teams, sometimes from different locations, will enhance the solid BlackRock Equity Dividend or help the new strategies.
BlackRock Capital Appreciation (MDFGX) manager Lawrence Kemp also survived the restructuring, and his team grew to 10 analysts from eight as it picked up staff from the Global Small Cap and the Large Cap series teams. Kemp also will take over BlackRock Large Cap Growth (MRLHX), which will be renamed BlackRock Large Cap Focus Growth and use the same process as BlackRock Capital Appreciation.
BlackRock Health Sciences Opportunities’ (SHSAX) manager, Erin Xi, and Neutral-rated BlackRock Science & Technology Opportunities (BGSIX) leader, Tony Kim, lived to manage another day. Hong Kong-based Andrew Swan, who has managed Asian funds since at least 2011, will pick up Neutral-rated BlackRock Emerging Markets (MDDCX) from Luiz Soares, who will leave five years after joining BlackRock during its 2012 equity fund restructuring. Meanwhile, BlackRock Global Dividend (BKBDX) manager Stuart Reeve’s London-based global equity team will take over Neutral-rated BlackRock International Opportunities (BREAX) and run it as BlackRock International Dividend Fund.
Hasta La Vista, Baby
Bart Geer, manager of BlackRock Basic Value since October 2012, is the most notable departure of the reorganization. Geer was a highly touted recruit from Putnam Investments in BlackRock’s previous 2012 equity retooling. His comanager, Carrie King, a holdover from previous manager Kevin Rendino’s team and a comanager on this fund since 2009, will take over BlackRock Basic Value with Joe Wolfe, a quant analyst who had helped with the fund’s quant-plus-fundamental process. King and Wolfe will join the income and value team under DeSpirito with one of BlackRock Basic Value’s three other analysts.
BlackRock’s Philadelphia-based Global Opportunities team and its funds are scattering in perhaps the most dramatic investment-team rejiggering at the firm. Leader and architect of the group’s bottom-up process, Tom Callan, and comanager Ian Jamieson will leave the firm as will several members of the 18-person team. SAE, the income and value team, and the global equity group in London will divide the five strategies that Callan’s group ran. The team’s sector fund managers Kim and Xie stay, as do at least five other analysts who will find new homes somewhere in BlackRock.
BlackRock Mid Cap Value Opportunities’, BlackRock Value Opportunities’, and BlackRock Global SmallCap’s Balaraman and Coyle also will leave as other teams assume their funds, as will former Large Cap Series manager Peter Stournaras.
It’s not hard to read the writing on the wall at BlackRock. Fundamental managers lost jobs and assets; quant managers gained. The death of fundamental active management at the firm has been a bit exaggerated in the news media, though. It still has a lot riding on old-school, bottom-up equity strategies and seems intent on making them more competitive with their peers and benchmarks. It's too early to know if this effort will pan out. In the meantime, BlackRock has sent active managers in its ranks and elsewhere a message: Active management with an arguable edge is still alive, but patience is not infinite.
Dan Culloton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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