Thank You Larry Fink

 

Thank you Larry Fink (and you too Rob Kapito) [respectively CEO and President of BlackRock].  That takes a huge weight off of our collective shoulders. Purchasing iShares has gone a long way to sorting out one of the age old debates of our industry.

For nearly fifty years, the asset management industry has been wrestling with what had become one of the most commonly researched and debated topics: active or passive?

BlackRock’s purchase of iShares is a game changer and will reshape the very nature of the debate. The question “should investors use either a passive or an active approach?” has been answered with a resounding “yes, well, both”.

Conceptual dichotomies (such as active/passive) often turn out to be less clearly demarcated than originally thought; there is in fact a lot of ground between two seemingly opposing camps.  BlackRock has unsettled the basic assumptions of a well established debate and in the process rendered it passe. In its shadow, BlackRock’s action inherently pushes us to ask another question: what is in between?

For a minute, put yourself into Mr. Fink’s shoes. What are your plans for marrying a very profitable actively managed business with the largest of its passive counterparts? Clearly, your goal is not to cannibalize the higher margin business to the benefit of  gaining volume in lower margin and “less sticky” vehicles – this makes no sense.  Perhaps you have been brought out of the active investors’ cave into the light of efficient markets hypothesis. Doubtful.

In fact, you realise today’s “market” is far more nuanced, intertwined and complex than it was just a few years ago, much less fifty. That the “market” is not singular but is made up of many regions, countries, sectors, industries, credit segments, currencies, etc. all available (or potentially made available) as ETFs.  That a big buyer of ETFs over the next decade will be the very portfolio managers who now are buying single stocks and bonds. That exchange traded vehicles are a good venue for accessing “active” approaches.

Well resourced, energized and innovative, Mr. Fink sees something that most do not and he has the wherewithal to take action. If you want to know where a big part of the asset management industry is headed, look in the direction of the dark abyss that formerly separated the active and passive camps.  It is in fact a very fertile valley and someone has been planting seeds.