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No discount for alpha

Just because the BlackRock/Barclays Global Investors merger will create a global funds management behemoth – with $3 trillion under management and 9,000 employees in 24 countries – does not mean alpha will come more cheaply. Amanda White spoke to vice chair of BlackRock, Robert Fairbairn, about what the merger means for products, clients and the industry at large, as part of an investigation into the role of the mega manager.

A series of medium-term themes accelerated in the past couple of years, including issues driven by client demand as well as supply-side economics, were instrumental in driving the BlackRock decision to merge with BGI.

And the word “merger” is a deliberate term used by vice chairman of BlackRock, Robert Fairbairn, who says the union is based on getting the best out of both businesses, and so it’s viewed very much as a merger, rather than a takeover.

This speaks to one of the themes, the desire to mix beta and alpha strategies in the offering to clients, in order to manage throughout the economic cycle. BlackRock obviously had the alpha-side covered, and BGI presented a compelling case with its passive capabilities.

“If we can have more capabilities inhouse then we can be a more complete provider to our clients,” he says. “We will not look to acquire a product if it is already a part of our suite of product and services.”

While there is typically doubt from industry observers around mergers, the complementary nature of the product offerings, the mutual appreciation of quantitative methods, and the foundation of BlackRock’s business as an independent asset manager.

“We have no interest in anything but investment management. We are only fiduciary managers, there is no leverage, no trading. This is an incredibly important distinction and has been at the heart of the firm’s success since the beginning,” Fairbairn says.

Scale was a big driver of the decision by BlackRock – which has a history of merger and acquisition with State Street Research, Merrill Lynch Investment Managers, Quellos, BGI – to merge. But not scale for scale’s sake, rather the offerings of the suitors had to be complementary.

“We believe scale is important for our role. In recent times balance sheet instability and lack of diversity has driven instability in service providers, that clients don’t need,” he says.

“We believe clients want more than just one product solution from providers. We want to help with asset allocation and to delve into our deep intellectual capital to help clients.”

Another strong element in the BlackRock portfolio of products that enables it to move towards its “One Platform One BlackRock” all-embracing proposition is BlackRock Solutions. It adds the risk management element to the multi-strategy offering that includes equities, fixed income, cash, and alternatives, in different styles and forms across both active and passive.

“Risk management has become sexy to talk about and it’s been at the heart since the firm was born with our own risk management analytics, BlackRock Solutions.”

Currently with about $7 trillion worth of assets on the system that can be analysed, it’s sold to large institutions such as sovereign wealth funds.

“It’s the reason we have helped a lot of governments and banks manage their balance sheets. We can only achieve most of this through scale and investment.”

In addition, while BlackRock has many offerings, the BGI ETF business, and the untapped growth in that part of the market made the iShares business a particularly attractive part of the purchase.

The rise of the mega manager has been met with mixed response, mostly from those whose toes it steps on such as asset consultants and smaller boutique firms, but also from institutional investors who are pondering the risks associated with multiple services from one provider.

Chief investment officer of CalSTRS, Chris Ailman, says he is trying to buy alpha, and that will always be the driving factor in hiring a manager.

“I’m not sure I necessarily want a one-stop shop, I want people that are good. I get the feeling small shops are hungrier, they have more focus on alpha because they have to have it to survive. Big firms are more worried about fees,” he says. But having said that BGI was CalSTRS largest service provider, with BlackRock not far behind, and Ailman says chief executive and chairman Larry Fink has already met with the fund to discuss a package of solutions.

However the mega manager is a common practice in other parts of the world, such as Holland, where the fiduciary business is outsourced by pension funds to one or two firms which act as lead managers.

Meanwhile Jim Callahan, executive vice president and manager of fund sponsor consulting group at Callan Associates, sees the burgeoning trend in asset management, where asset managers are playing consultant, as somewhat of an infringement.

“Managers are saying tell us your return expectation and we’ll build a portfolio. My initial retort is do you want to put all of your eggs in one basket? Business diversification is important, and maybe more so because of the under diversification of last year where investment returns were more concentrated than we wanted,” he says.” But having said that I also see that the trend to large managers, such as BlackRock, some of these have good applications with our clients. We are not trying to be asset allocation protectors, there will be good solutions for some clients.”

As Callahan points out, even though these mega managers are acting to some extent like consultants, they still need oversight by consultants, a new level of analysis and assessment on the manager and how they are coming up with the ultimate portfolio.

But after the market events of the past few years, one fact that no industry participant no matter what side of the fence will refute is there has been a recognition that alpha is not free, or ample. And certainly BlackRock’s Fairbairn is of the opinion that alpha is scarce enough that a premium must be paid to get it.

While the new mega manager, to be named BlackRock, will have more than $3 trillion under management, Fairbairn says there will not be a discount for alpha.

“A lot has been written around fees, not much will change. People pay a lot for consistent alpha because it’s rare. We won’t sell areas of great alpha cheaply,” he says. “The aim of this deal is for us to be a more complete solution provider to clients, it is not about driving down fees.”


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