Money, Economic & Investing | Financial news

BlackRocks active gambit ups pressure on rivals

BlackRock Inc's (BLK. N) decision to revamp part of its stock-picking business puts further pressure on active U.S. equity managers to cut fees, change products and merge to stem a relentless, 12-year decline in assets. BlackRock is replacing a handful of portfolio managers and doubling down on an investment in computer models and data science to boost returns and cut fees. The moves affect about 11 percent of its $275 billion active stock fund business but are a drop in the ocean for the company, the world's largest asset manager. Roughly two-thirds of its $5 trillion in assets under management and half its fee income come from index-tracking funds and exchange-traded funds, products investors are flocking to for superior returns and cheaper management fees. For rivals heavily reliant on active stock pickers, hiring computer geniuses to develop investing models and spending more on data mining may not be a cost-effective way of boosting performance. Axing portfolio managers can also trigger investor withdrawals."This is a little experiment for BlackRock but bad news for a lot of players in the market," said Kyle Sanders, a stock analyst for Edward Jones. The pain could be concentrated among smaller, active fund managers reliant on fleet-footed retail investors. Mangers of larger funds can put more money into their investment process and tend to have more institutional clients willing to endure a period of underperformance. But even larger companies are at risk. Analysts at Morgan Stanley (MS. N) see Franklin Resources Inc (BEN. N), home to the Franklin Templeton stable of funds, as one of the most exposed to fee cuts, because its assets are skewed toward the retail brokerage channel."Over the next three years, we see the management fee rate compressing by 12 percent, leading to revenue degradation of -18 percent," Morgan Stanley analysts said in a recent note. Franklin Templeton, the No. 5 mutual fund company in the United States by assets, did not respond to a request for comment.

In its most recent quarter, Franklin Templeton's assets fell 6 percent from the year prior, while operating revenue fell by 11 percent. For the wider industry, Morgan Stanley analysts' base case is fee compression of 10 percent to 15 percent and more than 25 percent in its bear case."We foresee a multi-year adjustment process that will affect the earnings and shares of publicly traded traditional asset managers," Morgan Stanley analyst Michael Cyprys said in a separate, recent research note. He added that fee cuts and product re-engineering could drive some companies to go private "and usher in an era of large-scale consolidation – not without risks."Consolidation is already happening. Janus Capital Group Inc (JNS. N) agreed in October to sell itself to UK-based Henderson Group Plc for $2.6 billion. Anglo-South African financial services firm Old Mutual (OML. L) this month sold a 25 percent stake in its U.S. fund management arm (OMAM. N) to China's HNA (0521. HK) for $446 million. YEARS OF FEE PRESSURE Actively managed U.S. stock funds have not reported a year of net inflows since 2005, according to Morningstar.

Over the past 12 months alone, fund companies including household names such as American Funds, Fidelity Investments, Franklin Templeton and T. Rowe Price Group Inc (TROW. O) have endured withdrawals totaling $131.8 billion, the research service said. By comparison, index-fund pioneer Vanguard Group attracted $342 billion in the United States, much of it into its passively managed index funds and exchange-traded funds. A look at industry fees helps explain why. Despite a 15 percent drop in U.S. equity fund fees in the decade ending in 2015, mutual fund managers on average still charge $131 for every $10,000 they manage, according to the Investment Company Institute, a trade group. Vanguard's U.S. stock funds fees average $18, according to Morningstar. Despite their higher costs, just 14 percent of active broad-market, large-cap stock funds beat their passive counterparts over 10 years through 2016.

American Funds defended its strategy. Low-fee shares of its largest fund, the $155 billion Growth Fund of America, beat most of its peers over five years, according to Thomson Reuters' Lipper unit."We are and will always be an investment management company first, run by people with deep expertise and phenomenal track records - enabled by some of the world's leading next-generation technology," an American Funds spokeswoman said in a statement. Fidelity said individual active managers continued to beat the market. "The active/passive debate usually focuses on the industry as a whole and the performance of the average active manager, but as with every industry there are some that are better than others," a Fidelity spokesman said in an email. Will Danoff, one of Fidelity's best stock pickers, experienced one of his worst years as a portfolio manager in 2016 when his $107 billion Contrafund

EU offers Brexit trade talks, sets tough transition terms

The European Union offered Britain talks this year on a future free trade pact but made clear in negotiating guidelines issued on Friday that London must first agree to EU demands on the terms of Brexit. Those include paying tens of billions of euros and giving residence rights to some 3 million EU citizens in Britain, the proposed negotiating objectives distributed by EU summit chair Donald Tusk to Britain's 27 EU partners showed. The document, seen by Reuters, also sets tough conditions for any transition period, insisting Britain must accept many EU rules after any such partial withdrawal. It also spelled out EU resistance to Britain scrapping swathes of tax, environmental and labor laws if it wants to have an eventual free trade pact. The guidelines, which may be revised before the EU27 leaders endorse them at a summit on April 29, came two days after Prime Minister Theresa May triggered a two-year countdown to Britain's withdrawal in a letter to Tusk that included a request for a rapid start to negotiations on a post-Brexit free trade deal."Once, and only once we have achieved sufficient progress on the withdrawal, can we discuss the framework for our future relationship," Tusk told reporters in Malta -- a compromise between EU hardliners who want no trade talks until the full Brexit deal is agreed and British calls for an immediate start."Starting parallel talks on all issues at the same time, as suggested by some in the UK, will not happen," Tusk said, while adding that the EU could assess as early as this autumn that Britain had made "sufficient progress" on the exit terms in order to open the second phase of negotiations, on future trade. Brussels has estimated that Britain might owe it something of the order of 60 billion euros on departure, although it says the actual number cannot be calculated until it actually leaves.

What it does want is to agree the "methodology" of how to work out the "Brexit bill", taking into account Britain's share of EU assets and liabilities. Britain disputes the figure but May said on Wednesday that London would meet its "obligations". The Union's opening gambit in what Tusk said would at times be a "confrontational" negotiation with May's government also rammed home Brussels' insistence that while it was open to letting Britain retain some rights in the EU during a transition after 2019, it would do so only on its own terms. Britain would have to go on accepting EU rules, such as free migration, pay budget contributions and submit to oversight by the European Court of Justice -- all things that drove last June's referendum vote to leave and elements which May would like to show she has delivered on before an election in 2020."Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory and enforcement instruments and structures to apply," Tusk's draft guidelines stated in reference to a transition period that diplomats expect could last two to five years to smooth Brexit.

"NO DUMPING" It also stressed that a future trade pact, allowing for not just low or zero tariffs on goods but also regulatory alignment to promote trade in services, should not allow Britain to pick and choose which economic sectors to open up. That would prevent London giving undue subsidies or slashing taxes or regulations -- "fiscal, social and environmental dumping", in EU parlance. The negotiations will be among the most complex diplomatic talks ever undertaken and the EU guidelines are only an opening bid. EU officials believe they have the upper hand in view of Britain's dependence on exports to the continent, while British diplomats see possibilities to exploit EU states' differences.

Tusk and Maltese Prime Minister Joseph Muscat, who holds the Union's rotating presidency, warned against such efforts and insisted the EU would negotiate "as one", through their chief negotiator, former French foreign minister Michel Barnier. He expects to start full negotiations in early June. Tusk spelled out priorities for the withdrawal treaty, which Barnier hopes can be settled by November 2018, in time for parliamentary ratification by Brexit Day on March 29, 2019:- the EU wants "reciprocal" and legal "enforceable" guarantees for all EU citizens who find their rights to live in Britain affected after a cutoff on the date of withdrawal- businesses must not face a "legal vacuum" on Brexit- Britain should settle bills, including "contingent liabilities" to the EU - agreement on border arrangements, especially on the new EU-U. K. land border in Ireland, as well as those of British military bases on EU member Cyprus.