BlackRock is breaking the wrong kind of records.

In this week's 'Article of Interest' we take a closer look at the underperformance of a very popular?wealth manager.

BlackRock is breaking the wrong kind of records.

Clients of the world’s largest asset manager lost an unprecedented $1.7 trillion in the first half’s?market carnage.

Feature Article, from:

Marc Rubinstein,?a former hedge fund manager and author of the weekly finance newsletter Net Interest.?

BlackRock?Inc. is used to breaking records. The world’s largest asset manager was the first firm to break through $10 trillion of assets under management. But the bigger they are the harder they fall.?And this year BlackRock chalked up another record: the largest amount of money lost by a single firm over a six-month period.?In the first half of this year, it lost $1.7 trillion (￡1.41 trillion) of clients’ money.

BlackRock management was quick to invoke the first-half?market carnage?when revealing the?investment performance?last week. “2022 ranks as the worst start in 50 years for both stocks and bonds,” Chairman and Chief Executive Officer Larry Fink?said?on his earnings call.?

While few firms are able to avoid what the market throws at them, some at least try to overcome it.?BlackRock is increasingly giving up: at the end of June,?only about?a quarter of its?assets were actively managed?to beat a benchmark?-- rather than track it seamlessly as passive strategies are designed to do. That’s?down from a third when BlackRock acquired?Barclays Global Investors in 2009 to become the leading player in exchange-traded funds.

Within the equities?business, the divergence is especially pronounced. Across the industry, assets have leached away from active strategies and into passive.?In BlackRock’s case, around $21 billion has flowed out of active equity in the past decade, with $730 billion flowing into indexed equity. The firm’s passive equity holdings are now 10?times larger than its active business, although it does operate some active multi-asset and alternatives strategies?that?narrow the gap.

For portfolio managers on the fixed-income side, the evolution of the business portends an ominous future.?

BlackRock’s roots lie in active fixed income. Fink founded the company in 1988 around strategies that “emphasize value creation through security selection…and are implemented by a team of highly qualified portfolio managers employing a strictly disciplined investment process,” according to the 1999 listing prospectus.

Although the firm also launched the first US-domiciled bond ETF in December 2002,?it didn’t catch on the way stock ETFs did.?In BlackRock’s case, $280 billion has continued to flow into active fixed income in the past 10 years. Fixed income is the biggest slug of what’s left of the firm’s active-management businesses —?it had $954 billion of actively managed bond funds as of June 30, compared to $393 billion of actively managed stocks. Passive has grown, but it’s only 1.5 times bigger than active in fixed income – a much smaller gap than in equity

All that may be about to change. The collapse in bond markets this year has shaken money out of active fixed-income funds. BlackRock saw clients pull more than?$20 billion during the first half of the year in a rout that has seen over $200 billion leave the industry. Some of that is rolling into passive funds, in particular ETFs, where BlackRock is picking up more than its fair share. So far this year, it has gained $39 billion of new money in ETFs and $25 billion in other indexed strategies. The shift toward?passive that started in equity is now accelerating in fixed income.

Until recently, bond ETFs were viewed with suspicion. Back in 2015, investor Carl Icahn, sitting alongside Fink on TV,?called?BlackRock “an extremely dangerous company.”?His rationale was that the firm’s ETFs embed illiquid bonds in unsuitably liquid wrappers. “They are going to hit a black rock,” he said.

Yet during the panic of March 2020, when bond markets froze, ETFs performed efficiently. They moved to a discount to the value of the underlying bonds, but that didn’t lead to a fire sale of the securities.?Rather than transmitting stress, bond ETFs?absorbed it?while providing investors with much-needed liquidity. This real-life stress test validated the structure, and now that bonds are sagging, money is flooding across.

On his earnings call, Fink explained the benefits. He observed that investors are using ETFs to quickly and efficiently gain exposure to thousands of global bonds and recalibrate their portfolios. “The challenges associated with high inflation to rising interest rates are attracting more first-time bond ETF users and prompting existing investors to find new ways to use ETFs in their portfolios,” he said.

For now, BlackRock’s fixed-income portfolio managers are mounting a solid defence. Unlike their colleagues in equities, their performance has been relatively strong. In the first six months of the year, the?funds they oversaw declined by?10.6%, marginally better than the firm’s fixed-income ETFs. According to the company, about half of taxable fixed-income assets are performing above their benchmark on a one-year view, compared with about?a third of traditionally managed equity assets.

But if fixed-income follows the path of equities, the divergence between passive flows and active flows will only grow. “This is the early days of a major transformation of how people invest in fixed income,” said Fink last week. “We expect the bond ETF industry will nearly triple and reach $5 trillion in AUM at the end of the decade.”

By then, BlackRock could be a lot larger, but its fortunes will remain firmly tied to the markets.

?

Our Thoughts:

Our initial thought is that this is a remarkably bad performance from possibly the most respected Asset Management firm in the world.They don’t even have the excuse that they took a little extra risk trying to make a little extra reward.?They actually took no risk, and underperformed.

What they did was nothing! Now this isn’t as bad as it sounds. Passive investing is huge and getting much bigger.?At TPP we are fans of it………..to a point, but not on its own unless what you’re looking for is simply market average for a reasonable price.

That is what a BlackRock ETF tracker will give you, average – could be worse I guess. BUT, if they were managing my money, average wouldn’t do.

A passive tracker is a wonderful invention and we have often quoted Buffett as saying that his best advice would be to stick your investment into an S&P tracker and do nothing else with it. Add to it from time to time, regardless of the price, and you will do well over the very long term.

We don’t disagree with this and many asset managers seem to be moving towards this model, much of which goes into ETF’s.?

However, if you can improve on this, then why wouldn’t you?

At The Portfolio Platform, we have our own trackers, and anyone can link to them for ￡55/month. It doesn’t matter how much is in the account, the cost will always be the same. This is a good initial building block for a portfolio and most of our customers allocate some capital to one, but only a small portion, and it’s only the start of a portfolio.

DON’T SIMPLY LEAVE IT THERE

Passive trackers over the long term should work.?If that’s all BlackRock are doing, then do they really deserve to make so much money out of it??

In 2021 BlackRock made over ￡15 billion in revenue.?If that’s from sticking client funds in a passive tracker and leaving it, then they are being overpaid.

On TPP, you can allocate a portion to a tracker, but you can then build on it with other strategies such as our ‘buy or flat’ strategies.?These look to improve on a tracker by selling out of the market after a move up, and then looking to get back in after the market drops back down.

A good example of this is?Cambridge Futures?and after posting 46% in 2020, 69.6% in 2021, they are up a market thrashing +6% so far in 2022.

The most impressive of these is probably the positive 6% in what Larry Fink, the CEO of BlackRock, correctly pointed out has been the worst first 6 months for both equities and bonds in 50 years.

We have several of these strategies for each of the major indices. On top of these we have our most active strategies which cost around ￡80/month?and look to actively trade for heightened returns.

From the small fees from a large crowd, we are able to pay the traders for their hard work. It’s our innovative software that allows our users to link their own portfolios,?to our traders’ portfolios and it is causing waves in the investment world.

Passive investing is fine. It won’t make you an impressive yield, but it will get you the average return of the index. If you were to link your account to our tracker with ￡100,000 then your cost would still only be ￡55/month. That is 0.66% per year. Link ￡200,000 and it becomes 0.33% a year. You are also able to heighten the return by deciding how much leverage to take. Link to the tracker at 2x the market, and you will track at 2x the market.

If trackers make money over time as they have proven to do, then why not make double?

We aren’t saying don’t invest in an ETF tracker, but when you can do it as part of an overall strategy run by professional traders, why wouldn’t you want more?

All you need to do is open an account with Interactive Brokers, and you can link your account to any number of our traders. Start with as little as ￡15,000 on?The Portfolio Platform?and join the new age of investing.

The movement is well underway. The investment revolution is gaining traction.