BlackRock Continues to Ride the Passive Investing Trend for the Better

The irony of this post is not lost on us. An active manager excited about another active manager moving more towards factor and algorithmic based investing.

On Tuesday, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

The initiative is the most explicit action by a major fund management firm in reaction to the exodus of investors from actively managed stock funds to cheaper funds that track every variety of index and investment theme.

Some $30 billion in assets (about 11 percent of active equity funds) will be targeted, with $6 billion rebranded BlackRock Advantage funds. These funds focus on quantitative and other strategies that adopt a more rules-based approach to investing.

The Big Trend

We like big trends. We like investing in companies that are riding and leading these trends.

One of the big trends out there is the rise of ETFs and passive investing over active investing.

The index and ETF leader is Vanguard but they are not a publically traded company. The second biggest ETF player, BlackRock (BLK), is. We own BlackRock.

Profitability

Active management generates far more revenue than passive investing because they have higher management fees than ETFs and index funds. Active management also has more costs. People cost a lot of money to employ.

Shifting towards index funds, ¬†ETFs, and factor-based investing means fewer people needed to run the funds and more computers. The gain in profitability outweighs giving up the extra revenue. The chart below is BlackRock’s operating profit margin going back to 1998.

BLK Operating Margin (Annual) Chart

BLK Operating Margin (Annual) data by YCharts

BlackRock’s Lead Position

The usual order is a small company with a new bright idea disrupting an established industry. It is interesting to see BlackRock, one of the largest asset managers, leading the charge and refocusing its core competency.

We like the move. It further BlackRock’s position to ride the big trend in asset management.

Further Reading:

BlackRock Bets on Robots to Improve Its Stock Picking (WSJ)

A Startling Admission From BlackRock (Evidence-Based Investor)

At BlackRock, Machines Are Rising Over Managers to Pick Stocks (DealBook)

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