BlackRock Inc., a company that thrived during a decade-long surge in index investing, has advised investors to place more emphasis on actively managed strategies.
BlackRock analysts stated in a recent paper that higher interest rates, ongoing inflation, and increased geopolitical risks present active managers and hedge funds with a greater opportunity to outperform simple buy-and-hold portfolios in what they describe as a “new regime.”
“While static asset allocations were a good starting point in the past, we believe they may not yield the same results in the future,” wrote BlackRock Investment Institute analysts Vivek Paul and Andreea Mitrache in the paper. “The era of extremely low interest rates is over, and future expected returns are less attractive.”
According to BlackRock analysts, in the ten years leading up to the Covid-19 pandemic, developed-market stocks and bonds outperformed cash by around 10 and 2 percentage points, respectively.
“Getting the asset mix right is now more crucial,” they emphasized, attributing the persistence of interest rates above pre-pandemic levels to “mega forces.”
The BlackRock analysts are aligning with top executives from major firms such as Janus Henderson Group Plc, Franklin Resources Inc., T. Rowe Price Group Inc., and Neuberger Berman in highlighting the importance of active management in today’s markets.
However, they are facing a client base that has been moving away from actively managed funds, with over half of mutual fund and ETF assets in passive products since late last year, according to Bloomberg data. At year-end, BlackRock managed about $10 trillion in client assets, with $2.6 trillion in active equity, bond, and other strategies, and $6.6 trillion in index and ETF assets.
The paper suggests that the gap between market winners and losers has widened since 2020, providing a greater opportunity to outperform broad market returns.
The analysts also point out that shifting between indexes is a form of active management, allowing investors to leverage their ability to time markets and consistently select exposure to the right sectors, regions, and styles.
BlackRock acknowledged that finding skilled portfolio managers capable of outperforming can be costly and challenging, suggesting that “budget-constrained investors may want to consider index building blocks instead.”
