BlackRock shook the world of active management on Tuesday when it announced that it had fired five of its 53 stock pickers. BlackRock will also move $6 billion of the $201 billion invested in traditional active management to quant strategies.
The announcement may not sound earth-shattering, but it augurs a larger trend: Traditional active management is dying, but perhaps not for the reason you might think.
The evidence has piled up in recent years that the vast majority of active managers fail to beat the market net of their fees. A common reaction is that beating the market is too difficult and that it’s therefore a waste of time and money to try.
But just the opposite is true. As I’ve previously noted, the problem is not that active managers fail to outperform the market; it’s that they keep that outperformance for themselves through high fees. In the meantime, index providers have turned traditional styles of active management — such as value, quality and momentum — into shockingly simple indexes run by computers. Those indexes have beaten the market and are now widely available to investors as low-cost smart beta funds.
Smart beta has proved to be a popular alternative to traditional active management. According to Morningstar, investors pulled $313 billion out of actively managed mutual funds over the last five years through 2016. At the same time, they invested $314 billion in smart beta mutual funds.
More here – Bloomberg Gadfly
PS: This is not so much fear the bots as fear the model. It has long been known that humans cannot beat simple models that can be run on home computers. Stock pickers or analysts generally do not have a model for stock/instrument selection rather they have a very loose aggregation of factors that are based around the need for a compelling narrative. And narrative is the least reliable mechanism we have for making a judgement since it more often than not flies in the face of data.
