New York/Boston (Reuters) – BlackRock's decision to revamp part of its stock-picking business puts further pressure on active U.S. equity managers to cut fees, change products and merge to stem a relentless, 12-year decline in assets.
BlackRock is replacing a handful of portfolio managers and doubling down on an investment in computer models and data science to boost returns and cut fees. The moves affect about 11% of its $275 billion active stock fund business but are just a drop in the ocean for the company, the world's largest asset manager.
Roughly two-thirds of its $5 trillion in assets under management and half its fee income come from index-tracking funds and exchange-traded funds, products that investors are flocking to for superior returns and cheaper management fees.
For rivals heavily reliant on active stock pickers, hiring computer geniuses to develop investing models and spending more on data mining may not be a cost-effective way of boosting performance.
Axing portfolio managers can also trigger investor withdrawals.
"This is a little experiment for BlackRock but bad news for a lot of players in the market," said Kyle Sanders, a stock analyst for Edward Jones.
The pain could be concentrated among smaller, active fund managers reliant on fleet-footed retail investors. Managers of larger funds can put more money into their investment process and tend to have more institutional clients willing to endure a period of underperformance.
But even larger companies are at risk.
Management Fee Compression
Analysts at Morgan Stanley see Franklin Resources, home to the Franklin Templeton stable of funds, as one of the most exposed to fee cuts, because its assets are skewed toward the retail brokerage channel.
"Over the next three years, we see the management fee rate compressing by 12%, leading to revenue degradation of -18%," Morgan Stanley analysts said in a recent note.
Franklin Templeton, the No. 5 mutual fund company in the United States by assets, did not respond to a request for comment.
In its most recent quarter, Franklin Templeton's assets fell 6% from the year prior, while operating revenue fell by 11%.