Blackrock in wave

Blackrock Looking for Answers to Their Troubling Performance

Blackrock in wave

What do you do when your entire active fund lineup is struggling? Well if you are the CEO of Blackrock, you invest hundred of millions of investors’ dollars and hire more of the best and brightest people than you already have to try to fix it.

According to a recent article in Bloomberg, it was reported that 70 of the 84 actively managed funds from Blackrock ranked in the bottom half of their categories over the past 5 years, causing net outflows from investors over 19 of the last 21 quarters. The S&P 500 has returned over 60% during the same time period.

All the while, the passive investment strategy arm of Blackrock is doing quite well given its rise in popularity over the last few years. Their exchange-traded funds (iShares ETFs) have now attracted more than $1.1 trillion in assets under management, almost 5 times more than the assets that are currently invested in their active equity strategies, as of the end the 2014 calendar year.

Blackrock’s CEO, Larry Fink, is still confident that the active side of their investment business will stage a comeback in the near future: “If you believe in a world that one day, you will have—whenever that day will be—higher rates, it generally means, historically, you would think this is a better environment for stock picking in fundamental equities…our model is purposely built and positioned to benefit on this active and passive world.”

Although Mr. Fink’s confidence might bring ease to Blackrock investors, we believe this confidence is misplaced. The growth in the index fund industry has been slow, but has brought significant attention to market efficiency, taxes, costs and expenses in the mutual fund industry as a whole. With the large leaders, like Vanguard, allowing for investors to gain exposure to the entire domestic stock market for 0.05%, many investors are wondering why they should pay over 1.00% for something that is performing worse. The chart below illustrates the dollar-weighted expense ratios of all of Blackrock’s active funds versus their passive funds. As you can see, the average active Blackrock fund investor is paying 5 times more in expenses every year versus their passive investor based on Morningstar data. The incentive to resurrect their active investment lineup is simple: the average dollar in revenue coming from Blackrock’s active investment lineup is 5 times greater than the average dollar invested in Blackrock’s passive investment lineup. There is a lot of money at stake for Blackrock’s business.

As one of the largest investment companies in the world, Blackrock definitely has the odds stacked against them in terms of having their actively managed investment strategies outperforming their peers. In terms of hiring the best the brightest, here are a couple of examples of the talent they currently have at the helm of their actively managed strategies:

  • Blackrock Capital Appreciation Fund – Lawrence Kemp, CFA, MBA from University of Chicago
  • Blackrock Equity Dividend Fund – Bob Shearer, CFA, MBA from University of Wisconsin
  • Blackrock Disciplined Small Cap Core Fund – Travis Cooke, CFA, MSc. from the London School of Economics
  • Blackrock Global Long/Short Credit Fund – Michael Phelps, MA from University of Cambridge

This is just a short list of the credentials of the professionals that are managing Blackrock’s active investment strategies and as you can see, their qualifications are quite impressive. What was not listed is the vast amount of experience that these individuals have in the investment management business and yet their individual knowledge is no match to that of the entire market.

Investing millions of investor dollars to resuscitate Blackrock’s active investment lineup may appear to generate more profits for Blackrock, but based on numerous academic studies, it is not likely to benefit Blackrock shareholders or their mutual fund shareholders. Due to market efficiency and the higher costs of active managent, the odds are stacked against outperforming the risk appropriate benchmarks for all active managers. Our hope is that the most recent trend of investors buying into Blackrock’s passive investment lineup will dictate the future agenda of Blackrock. Now, if those ETF investors could just learn how to buy and hold, instead of trading their ETFs all day long.