One of the main issues with discussing long-term trends in any industry is that they’re often prophecies based on conceptual ideas that lack regular and tangible events.
This makes it difficult to either support or disagree with any single argument. But I suppose this is what makes them long term.
For example, I’m sure many of us have sat with friends, families and colleagues and discussed the future outlook of the world. Be this geopolitical, environmental, or even how human beings will interact with the economic factors of production and the workplace in the future. The latter is certainly of growing interest, and the rise of robo-advisers is one long-term trend with plenty of tangible evidence.
But another trend – where active investment managers are replaced by non-humans – seemed a little more conceptual and lumped together with the ‘robots will takeover’ mantra akin to Arnold Schwarzenegger epics from the 1980s.
As we all opined with the Standard Life-Aberdeen merger, fund groups can only cut costs by shedding human capitalTaha LokhandwalaUntil last week that is. BlackRock’s decision to reorganise its active equity investment teams is a significant and tangible event for this long-term trend. In the US, the firm will drop fund managers and separate its products into quant-driven algorithmic strategies while retaining some high-alpha stockpickers.
Make no mistake, despite this only affecting around $30bn (£24bn) of assets from US investors, such moves will come to Europe. Once groups have the size, foundations, and political nerve to make such moves, they will. And from a fund manager’s perspective, the irony of redundancies and the increasing use of technology instead of human capital making a company more profitable for shareholders should not be lost on them.
Despite this being one of the first significant tangible events, I suppose all the signs have been pointing this way – it just happened sooner than expected. We have all heard of how many traders used to populate the floors of the New York and London stock exchanges, numbers that have gone from the thousands to the mere hundreds due to technology.
But pressure on revenue comes with two options: find new sources of income or decrease costs. The former, for active fund groups, seems difficult given the rise of competition from passives, so the latter remains the only option. As we all opined with the Standard Life-Aberdeen merger, fund groups can only cut costs by shedding human capital.
BlackRock expanding this strategy should make it more competitive and alter the economic environment for asset managers in general given the firm’s size. The quant strategies will effectively replace its core equity or ‘benchmark-plus’ offerings, and the fund manager redundancies come alongside everyone’s desired outcome – a fall in fees for these funds.
Fund selectors must be prepared to replace core equity ‘benchmark plus’ holdings with cheaper, quant-driven strategies as this could be the only option other than going full passive – the implications of which we discuss in this week’s issue.
How quickly this will happen remains to be seen.
Taha Lokhandwala is news editor at Investment Adviser
