BlackRock, the largest fund company in the world, is experiencing a new problem that has affected the entire finance industry in recent years. Funds actively managed by human managers have fallen out of favor for funds managed by robots. At BlackRock, these low-cost funds have enjoyed enormous growth as human stock pickers, who drove much of the firm’s growth in its early days, are beginning to fall by the wayside. The growth of passive investing has also posed a threat to Wall Street’s human money managers. Passive investing has seen increased popularity in recent years with trillions of dollars coming out of actively managed funds to be invested in low-cost, exchange-traded funds and index funds, according to Bloomberg.
BlackRock sees machine-driven funds as the future. It has described a plan to strengthen its actively managed funds by introducing other means of investing besides human judgement, such as algorithms and quantitative models.
“The democratization of information has made it much harder for active management,” said Laurence D. Fink, a founder and chief executive of BlackRock, in an interview for The New York Times. “We have to change the ecosystem—that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies.”
As a result, seven of BlackRock’s 53 stock pickers will leave their funds and several money managers will be delegated to an advisory role, according to The New York Times. This recent interest in robots that can manage funds is a far cry from the image of the intelligent mutual fund manager that has dominated Wall Street since the 1990s.
Even today, asset managers still claim that they can outperform the market but charge a high price for their services. Since the 2008 financial crisis and subsequent recession, however, the performance of actively managed funds has suffered. Investors have dropped these expensive mutual funds for passive funds like Vanguard 500 that performs better than most actively managed funds and charges a mere fraction of the cost.
Technology is also playing a large part in the change of how investing is conducted on Wall Street. Quants and managers may now buy or sell Walmart’s stock by looking at a satellite feed to see how many cars are in the company’s parking lots, instead of the time-honored practice of evaluating a company’s balance sheet, according to The New York Times.
This is not to say that active management is disappearing. For BlackRock, active management represent 16 percent of its revenue. However, “According to data from Morningstar, only 11 percent of BlackRock’s actively managed equity funds have beaten their benchmarks since 2009,” The New York Times mentions.
BlackRock has seen the direction investing is going in—including lower fees, more passive investing and a greater use of technology such as algorithms, robotic advisors and managers, and big data to help invest.
“The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy—that does not work anymore,” said Mark Wiseman, a former top executive from a Canadian pension fund. “These are stormy seas for active managers, but we at BlackRock are an aircraft carrier, and we are going to chart our way through these seas.”
Most investors would probably agree that BlackRock is making an intelligent decision. Some believe that many who work on Wall Street will soon lose their careers as an influx of programmers hired by financial institutions write self-teaching algorithms that can do their jobs better than they can.
“Algorithms are coming for your job—they only ask for electricity,” said Rishi Ganti, who owns the firm Orthogon Partners Investment Management Co. “Algorithms are already reading, processing, and trading the news even before the photons have hit your retina.”
To counteract this, Ganti suggests that human managers have to find a niche in which they can specialize in. He recommends esoteric assets, which are some of the most obscure investments one could acquire. Some of Ganti’s investments have included “alternative funding for charter schools in the United States, or cash paid upfront to collect judgement due at Brazil’s supreme court,” according to Bloomberg. These types of investments require human capital to manage, which justifies the purpose of having a human fund manager in an industry kowtowing to technology’s capability.
Funds that use algorithms for trading already account for a third of the industry’s assets. Stock analysis is increasingly being done by machines instead of humans. Investing in esoteric assets may be a good way for fund managers to distinguish themselves from robots and computer code, but it is hard to perform well, as the assets themselves are risky and hard to value. Orthogon has managed an even 14 percent return on esoteric assets, from September 2008 to December 2014, outperforming the S&P 500 index.
Additionally, human capital is useful in other ways. Some wealthier clients have been wary of moving their investments to firms entirely managed by robots, like Betterment LLC. Betterment has added advice from financial planners to its services. The top four robotic advisors have boosted their assets by almost 80 percent last year.