BlackRock Inc 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 stockpicking 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.
Planned fee cuts on that group of funds and its "Income" products will slice about $30 million of BlackRock's revenue, and the company will take a $25 million charge this quarter to reflect severance and other compensation expenses. 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. Active stock managers in the United States have been smacked with withdrawals in recent years as investors increasingly fled to lower-cost products, including index-tracking exchange-traded funds, some of which charge as little as $3 annually for every $10,000 they manage, while the average charged by U.S. stock mutual fund managers is $131, according to data for 2015 from the Investment Company Institute trade group.
An industry bellwether, New York-based BlackRock also owns one of the most prized businesses in asset management, its iShares ETF franchise purchased from Barclays in 2009. Much of the company's active stock franchise is from its 2006 acquisition of Merrill Lynch Investment Managers. The changes mark the latest of several attempts by BlackRock to boost an active fund business that represents nearly a third of its assets but an outsized near-50 percent of its fees. BlackRock CEO Larry Fink has sometimes expressed disappointment in the performance of the company's actively managed stock funds, and he has pivoted increasingly to focusing on the company's data-driven "Scientific" equity teams.
"It seems like the Vanguard approach to active equity management," said Jason Kephart, senior analyst at Morningstar Inc, referring to the giant BlackRock rival that aggressively cuts fees and has also invested in tech-driven investment styles."The easiest way to make an active strategy more attractive is just to charge less for it."BlackRock's equity overhaul also invites comparisons to that of another major asset firm rival, Pacific Investment Management Co. In 2015, Pimco's equity chief left and the Newport Beach, Calif firm liquidated two of its equity strategies after spending years attempting to diversify its investor base to include those buying equity products. BlackRock shares rose 1.50 percent to $380.63 per share on Tuesday before the announcement.
Some of Europe's most profitable lenders pay their chief executives the least, data from shareholder advisory group ISS shows, while loss-making banks reward their bosses more lavishly. Despite caps on bank bonuses introduced across much of Europe after the financial crisis, pay still varies widely - sometimes independently of profit - the survey of 11 of Europe's biggest banks, which was compiled by ISS for Reuters, reveals. The ISS data, which compares CEO pay, pension and benefits in 2016, shows the CEOs of Credit Suisse and Deutsche Bank received 7.3 and 4.7 million euros ($5 million) respectively. Both banks made heavy losses last year after big legal penalties relating to their investment banking activities. At the other end of the spectrum, Jean Laurent Bonnafe, CEO of France's BNP Paribas and Casper von Koskull of Swedish retail bank Nordea earned less than half as much although their banks recorded profit of 7.7 billion euros and 3.8 billion euros. The ISS calculations, compiled using company data, may vary from the headline figures highlighted by the banks as is includes cash and benefits actually paid, such as toward a pension. The contrast revealed in the data comes as Credit Suisse CEO Tidjane Thiam and Deutsche Bank chief John Cryan put their companies' broad policy on executive pay up for approval at shareholder meetings where they face investor unrest."Pay tends to be explained as high risk, high reward. But the payouts can remain high, regardless of result," Andrew Gebelin of Glass Lewis, an advisory group influential among investors, told Reuters."We would anticipate more controversy over pay at banks in the months ahead. There has been quite a growth in shareholder opposition. It is high on their list of concerns."
Last year, Credit Suisse racked up a 2.7 billion Swiss franc loss, its second in a row, after a trading mishap and a $5 billion penalty for the sale of toxic mortgage debt. CEO Thiam, who has been awarded 19 million francs worth of bank stock since joining in 2015, as agreed in his contract, increased the bonus pool as he sought to keep staff on board. Each staff member in its investment banking and capital markets division earned 400,000 Swiss francs on average - while the business made a pretax profit equivalent to just 84,000 francs per head. The Swiss bank, which benchmarks itself against rivals in the U.S. and Europe when setting pay, declined to comment. Last year, Deutsche also reported a loss of 1.4 billion euros after a similar fine.
Cryan, who waived his bonus, will present a fresh pay plan for executives tied closer to performance in May after shareholders voted down the one proposed last year. Thomas Philippon of New York University, who has studied pay among investment banks, said they had been too slow to cut."They reduced the wage bill mostly by cutting staff, not by cutting wages," he said, commenting on the sector.
MOOD CRITICAL Cutting pay may prove critical in winning over investors, particularly for Deutsche, which is calling on shareholders for fresh funds, while Credit Suisse is considering doing the same. However, the mood among investors is increasingly critical, with Larry Fink, head of fund giant Blackrock, a large shareholder in banks, warning in a letter to company heads that it would be willing to vote down bad pay deals. Norway's wealth fund also told Reuters it was taking a closer look at pay. One investor, speaking privately, was more blunt about investment banks. "Their business model is that the minute they do well, most of their employees take the gravy," he said. Wages have shrunk since 2010, when the former chief executive of Credit Suisse, Brady Dougan, received nearly 90 million Swiss francs. Nonetheless, some investors want them to fall further and hold the Netherlands up as an example."There are different cultures across companies in Europe," said Gebelin of Glass Lewis. "The Netherlands has an extremely restrictive pay regime, as does Sweden, but that doesn't hold for Switzerland or the UK."Ralph Hamers, ING's