BlackRock has been tremendously successful with its empire of exchange-traded funds. That may be great news for its business, but perhaps not so much for its workforce.
Without a doubt, ETFs are going to play a huge role in the future of asset management, and any firm that has a leg up in this arena will probably accumulate a greater share of assets.
BlackRock, which is credited with the first fixed-income ETF, has clearly been a leader in this realm, with almost $1.1 trillion under management in its iShares business, up from $914.4 billion in 2013. ETFs were BlackRock’s top asset gatherer globally last year, according to the firm’s annual financial statement filed last month.
But BlackRock’s success may also lead it to rely less on people in relation to its assets. The firm, which has more than $4 trillion under management, is planning to cut about 400 of its employees in what may be its largest round of cuts ever, Bloomberg News reporters Sabrina Willmer and Kiel Porter wrote in an article on Wednesday. While the layoffs aren’t monumental, equal to about 3 percent of the firm’s staff, and don't preclude hiring in certain areas later in the year, they mark a slowdown from BlackRock’s rapid growth over the past decade.
Several factors could explain the cuts. This year’s intense market volatility has led to the demise of a slew of hedge funds and diminished returns for many other investors. BlackRock hasn’t been immune to that, with its global fixed-income hedge fund suffering its worst start to a year in its 19-year history.
Also, the New York-based firm’s assets have plateaued and even dipped from their peak last year of almost $4.8 trillion, with money moving out of some active strategies and into ETFs.
And then, there are the ETFs themselves, which are tremendously popular among individuals as well as hedge funds and other institutions. They attracted $347 billion of new money last year, breaking the previous year’s record.
But here’s the catch from a profitability standpoint: They generally track indexes and usually don’t require much (or any) specific security analysis. They also carry lower fees than average actively managed funds. These two factors together add up to lower demand for people and less money relative to assets to pay them.
The lower cost is attractive to investors who have witnessed active funds post disappointing returns relative to their benchmark indexes. As Ben Phillips of consulting firm Casey Quirk & Associates said in a Bloomberg News article last month, “Investors have decided if they are not going to get real outperformance from their managers, they might as well opt for lower fees.”
The low fees are getting even lower as the biggest fund managers battle for market share. This price war prompted BlackRock to cut fees on seven funds last year.
"Blackrock is a microcosm of the disintermediation of the entire financial industry that ETFs are causing," said Bloomerg Intelligence analyst Eric Balchunas.
BlackRock shook up the asset-management world with ETFs and will most likely continue to dominate the field. It just will need fewer people to keep its colossus moving forward.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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