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Blackrock Prefers Robots To Humans For Picking Stocks

The world's largest investor Blackrock recently announced that it will be using computing programs to make stock picks for some of its funds. The firm has slashed its fees for these funds which account for nearly $30 billion of the firm’s total assets of $5 trillion.

The shift comes amidst rising criticism that investment decisions by active managers yield poorer returns than benchmarks.

The use of computing power to drive stock picking decisions has been gaining ground recently, as it results in reduced fees while generating robust picks thanks to the use of data science.

Blackrock’s model is a blend–funds are actively managed by computers but fees are as applicable for passive investing.


In a statement, Dan Culloton, Director, Equity Strategies at brokerage Morningstar said,

It has always been difficult for active managers to outperform their passive benchmarks, but investors have never been more aware of the fact. Investors have a lot of lower cost options today, from dirt cheap broad index funds to strategic beta offerings that harness modern computer processing prowess and research to systematically duplicate the factors that marginal active fundamental managers got away with leaning on for decades.

Blackrock’s decision will yield savings of $30 million annually as portfolio managers would be leaving the firm since they will be replaced by computers. The firm had earlier decided to reduce its fees by half across the board as it comes under increasing pressure for its poor active management performance.

Blackrock’s actively managed funds have been performing below par for several years, lagging behind both competitors and stock market benchmarks. The average return for its funds have been 4 percent annually while it has been 5.3 percent for the average mutual fund and nearly 10 percent for the stock market benchmark indices.

Active management fees account nearly 50 percent of all fees for the investment firm. However over the three years leading to 2016, the size of assets under its active management has dropped by $42 billion to $275 billion.

Many in the investment industry such as John Bogle, the founder of the passive investment group Vanguard have been staunchly critical of active management. They believe that there is no added value from active management and it only results in unnecessary fees to customers Blackrock founder, Larry Fink has citied the democratization of information as a reason for the relatively poorer performance by active managers. A few fund managers have pointed out that because of the wide coverage of large and mid-cap stocks by investment analysts, profitable picks are now available to all.

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