WASHINGTON, March 29, 2017 – Over the past 48 hours, news reports have been breathlessly announcing the impending replacement of actively-managed fund and ETF advisors set to begin at giant Wall Street money management firm BlackRock.
BlackRock is best known to retail investors as the owner-operator of the iShares family of ETFs, which it acquired from Barclays back in 2009 as the worst point of the Great Recession hit its crest. A Tuesday Reuters report drilled down on the details of the BlackRock move:
“BlackRock on Tuesday said it would overhaul its actively managed equities business, cutting jobs, dropping fees, and relying more on computers to pick stocks in a move that highlights how difficult it has become for humans to beat the market.
“The world’s biggest money manager has faced active stock fund withdrawals and the revamp is its biggest attempt yet to engineer a turnaround.
“Last May, BlackRock said it had recruited Mark Wiseman, the head of Canada’s biggest public pension fund, to oversee the stock picking operations after he revamped that fund’s operations to embrace data-mining and other technological approaches to investing.
“BlackRock is rebranding or adjusting investment strategies on about 11 percent of its $275 billion active stock fund business, putting a greater emphasis on technology-driven investing approaches in the largest set of sweeping changes for the business since transformational mergers that allowed it to grow to manage more than $5 trillion in assets.
“Among the changes, BlackRock is removing some seven traditionalist ‘Fundamental’ portfolio managers from their current assignments, according to a source familiar with the matter. More than 40 employees are being laid off, including some of the portfolio managers, according to another source.
“The company will also cut fees on some products that are being rebranded as an ‘Advantage’ series of lower-cost active funds…
“The company said it will also expand its investments in data-mining techniques that it said can improve investment performance. Other funds are being refocused to take ‘high-conviction’ bets on stocks.”
In a follow-on to yesterday’s report Wednesday, CNBC reporter Michael Santoli, alluding to famed New York Yankees philosopher Yogi Berra, observes
“BlackRock’s move this week to replace dozens of fund managers and analysts with robotic stock-selection tools reflects a powerful and somewhat puzzling feature of today’s market: No one does stock picking anymore, it’s too crowded.”
We’ve occasionally observed in this column that after our long, recent investing nightmare—courtesy of the one-two punch delivered by the Great Recession and Barack Obama’s Great Transformation—we have now endured nearly a decade during which the art of stock-picking through fundamental and technical analysis seemed to have become obsolete.
As the Federal Reserve flooded the investment banking community and its wealthy participants with free, taxpayer provided (or paid-for via government debt) money, a great deal of which went toward inflating the prices of common stocks, stocks in nearly all investment sectors suddenly seemed to be moving in lock-step up or down. During this period, which now appears to be ending, once-successful stock-pickers, professional and amateur alike, routinely lost out to passively managed market index funds when it came to bragging rights for annual returns.
In other words, it eventually got to the point where investing in any index fund or index ETF that was passively based on various industrial averages like the S&P 500, would routinely beat the investment choices of professional and amateur stock pickers. Their carefully researched investment choices simply couldn’t beat the returns the average investor could get by dumping his or her money into a passive major-index fund and forgetting about it.
In this context, BlackRock’s move would appear to make a great deal of sense. However, as we’ve also periodically observed in this column, with the Federal Reserve belatedly returning the U.S. to a normal interest rate and investment situation, we are seeing in our own portfolios that stock-picking has begun to work again.
CNBC’s Michael Santoni would seem to agree with what we’ve been thinking:
“There’s a growing argument that the fashion for owning the index and using quant tools is setting the stage for its own demise, that so many dollars willfully ignoring traditional fundamental analysis and sleuthing will reopen an opportunity for stock pickers.”
In other words, we have to ask the burning question: is BlackRock now adopting a strategy that will shortly become obsolete itself as stock-picking reasserts itself as the time-honored way to invest and, hopefully, “beat the averages”?
In over 35 years of rolling our own portfolios, we’ve learned something important in investing as well as life: When “everybody” knows something, “everybody” is always wrong. I.e., when “everybody” is buying IBM, the thing to do is sell IBM. Over the years, this contrarian attitude, coupled with fundamental and technical due diligence, has worked for us nearly 9 out of 10 times
Whether we’re talking about the usefulness of investing techniques or baseball games, we must refer back again to Yogi Berra, the sage who once observed, “It ain’t over ‘til it’s over.”
Stay tuned. Meanwhile, we’ll continue to regale you with our own stock-picking adventures in our companion column.