Broad menu benefits BlackRock but performance remains key

The overarching trend of increasingly, and effortlessly, combining active and passive investments in private banking clients’ portfolios plays well to BlackRock’s strengths. The world’s largest asset manager, running more than $6.4tn in client assets globally, is a superpower both in the active space, as well as in the passive arena through its family of iShares ETFs.

Michael Gruener, head of the Emea retail business at BlackRock, previously headed the distribution efforts of iShares in the region, before moving to his new role two years ago. 

“Clients have a risk budget and a fee budget and they need to marry both to construct an efficient portfolio,” says Mr Gruener, having spent most of his career in the active management space, starting at Goldman Sachs Asset Management. 

Private banks – including international and UK brands such as Barclays, HSBC or JP Morgan – account for 40 per cent of the firm’s Emea’s retail business, worth around $300bn, and represent its largest single source of assets. 

While three years ago, the domestic UK market was the biggest revenue contributor to the business within the region, the balance has somewhat shifted, with the continent now representing a slightly higher percentage. Switzerland, Italy and Germany are the firm’s largest markets in the region, experiencing fast growth rates, with France also rapidly expanding. 

BlackRock’s increased focus on the continent dates to a few years ago, when through its “localisation strategy”, senior heads in key markets were hired, and then portfolio management capabilities increased.

Twin targets

Mr Gruener’s two-pronged distribution push aims at increasing market share within its top banking clients and also expanding penetration in mid-sized banks. 

“On one hand, the large tier one distributors are asking for more than just building blocks,” he explains. “They are looking for deeper, strategic partnerships with fewer providers, a breadth of products, across both active and passive, distribution and marketing support, help with training, as well as technology solutions.” 

The technology service is in “heavy demand”, explains Mr Gruener, stating that it is his responsibility, as it is for each employee, “to bring the whole firm to clients”.

BlackRock has a 30-year-long track record of providing institutional clients with a risk and portfolio management system, Aladdin, which was developed internally and is still used within the firm. Four years ago it launched Aladdin for Wealth, tailored to the needs of wealth managers. The software enables advisers to have “richer, more meaningful conversations with their clients”, acting as a single operating platform across banks’ multiple departments. 

On the other hand, he says, the mid-sized, or ‘tier two’ distributors increasingly ask for holistic solutions, generating specific outcomes. They require portfolio construction and asset allocation support, as well as manager selection services. 

Across all types of distributors, clear trends have emerged on the product side, including growing appetite for real assets and illiquid solutions, which can now be wrapped as a Luxembourg Eltif [European long-term investment fund]. The structure allows addressing some of the past challenges when distributing illiquid solutions to private banks, such as tax, tax reporting and minimum investment sizes.

Alternative Ucits funds, offering mainly daily liquidities, have also been a “smashing success” in Europe, reports Mr Gruener, with many private banks aiming to have at least 15 to 20 per cent of ‘liquid alternatives’ in client portfolios.  

Choppy waters

With choppy markets, distributors ask for asset classes and investment strategies that are uncorrelated to the market, such as long/short, event-driven, merger arbitrage strategies and unconstrained fixed income, but in the form of liquid solutions, as opposed to the traditional, illiquid and expensive hedge fund structures.

Despite outflows from fixed income, some areas of the asset class are growing, including short duration bonds and floating rate notes, having less exposure to the yield curve risk, in addition to unconstrained fixed income.

In the equity arena, quantitative equities have become very popular. In June, BlackRock launched a range of active equity solutions, managed by BlackRock’s 80 plus strong systematic active equity team, based in San Francisco and London. The funds bring together “technology, big data analysis and responsible investing at an attractive price”. 

Rapidly growing demand for ESG investing strategies has led to the launch of a new suite of ESG emerging market debt funds this year.

Thematic investing

Thematic investing is also proving popular among wealth managers, and has been one of the highest growth areas of the market over the past few years. Thematic funds offer private bankers the opportunity to engage with their clients in much more dynamic conversations, and capture their imagination. In September,as a natural extension of its historical sector fund range, the firm launched a suite of actively managed thematic funds to cater to client demand. 

These include the next generation technology, future of transportation and the fintech funds, which join the existing new energy fund. They all tap into the five ‘megatrends’ identified by the firm, including economic power, demographics, urbanisation, climate change and technology. 

Investing in powerful themes is expected to deliver above average growth rates over the long term. 

“By finding winners of these long-term trends early in the cycle, investors can maximise the opportunity to generate superior returns,” says Mr Gruener. 

The series of thematic funds complement the iShares thematic ETFs launched in 2016, whose product development was largely driven by the availability of good quality, granular data on companies, particularly in emerging markets, and technology breakthrough.

Both the active and passive thematic product range is expected to grow and expand at BlackRock, but while ETFs enjoy a much shorter, and cost-effective launch cycle, no active fund will be launched unless there is evidence it will be able to provide a sustainable advantage to clients, and there is expertise within the firm able to deliver it.

Active’s back 

With increased market volatility and lower cross correlation between stocks within one sector, it is more likely an active portfolio manager can outperform, as opposed to the past nine years when all assets have risen indiscriminately. This explains why active management is in demand today, states Mr Gruener. 

None of the top three selling asset classes year to date – high conviction multi-asset, unconstrained fixed income and liquid alternatives – can be indexed, he explains. 

But while having the largest mutual fund platform in Europe certainly helps meet distributors’ needs in any macro environment, it does not mean overwhelming clients with products. On the contrary, being very selective is paramount.

“When we meet our clients, we want to focus on our best products, which fit into the macro environment, and we try to identify our highest alpha producing strategies within our range,” he says, explaining that the distribution team focused only on 14 funds last quarter. 

There is also increasing demand for customised solutions, which is well suited to BlackRock’s institutional heritage. The firm has run segregated mandates for institutional clients for decades.

The firm recorded a 40 per cent growth in retail sub-advisory assets over the past year, with the three largest sub-advisory markets in Europe being Italy, UK and Switzerland. 

MiFID regulation, increased price transparency, and margin compression are some of the key growth drivers. 

“Clients want dedicated strategies which bring them transparency and control over their portfolios. And in a world where distributors’ margins are going down, they want to deliver solutions at institutional volume and at institutional prices,” he says. 

On the sub-adviser’s side, while the price is lower, sub-advised assets are more sticky, he adds, thanks to the longer-term, deeper client relationship which is established. 

In the current environment, scale is “extremely important” to develop products that are more effective and efficient, and the M&A activity, very strong over the last couple of years, is set to continue, believes Mr Gruener. 

 “A fund should have at least $100m for any asset class, for it to run profitably over the long term,” he says. 

 “We are living in a ‘winner take most’ environment,” he says. “If a product is underperforming or its investment style does not fit into the macro environment we are in, then it is not being bought. Competition is hard and intensive.”