$5 Trillion & Growing
October 24, 2016
The asset management firm, BlackRock, made some news this week with the report that it currently manages $5 trillion of assets. This is an astounding amount of money that exceeds the 2015 GDP of every nation on Earth, except the USA and China. It is very interesting to learn that the primary source of growth for BlackRock has been in passively managed ETF funds.
As you know, funds are generally classified as being either “active” or “passive.” Active fund managers are often called “stock pickers.” Their investment theses argue that their portfolio management skills and insight will enable them to beat the “market.” By comparison, passive management seeks to construct portfolios that simply mirror the market’s overall performance. BlackRock’s success has come from offering investors a wide variety of passive solutions, and investors have flocked into its funds.
The most common passive solutions seek to match the performance of indices like the S&P 500, the Russell 2000, and the MSCI EAFE. There are also passive solutions in the bond world. Over time, the development of passive funds has led to literally hundreds of ETF solutions being available today, just like there are hundreds of solutions on the active side of the asset management world. Much of BlackRock’s success can be attributed to its innovative approach of expanding its passive funds into additional asset classes, which appeals to investors.
BlackRock’s announcement prompted many press articles about the merits of active versus passive portfolio solutions. As you would expect, the articles grappled with the inevitable question of which one is the best. The answer is of course nuanced, and depends heavily on each investor’s objectives. I am always suspicious of any attempt to claim a “one size fits all” approach to investing, when market opportunities are so vast and diversification is essential. As clever as the team at BlackRock is, there are opportunities to invest that are outside its passive product menu.
In addition to the growth of passive funds, I also wanted to draw your attention to the fact that investors’ cash “on the sidelines” is at its highest level in 15 years. I believe this is key to understanding current overall market risk and opportunity.
In the past, we noted the challenges we face as investors to find returns even as the market is trading at, or close to, all-time highs. Now, we find that cash is also at a generational high. I believe that cash can develop a “bubble” just like a market can. What do I mean by a cash bubble? Well, such a bubble provides a large store of capacity to make investments. When investors start to invest this cash, the impact could send a tsunami through the markets. We investors must always remember to keep in mind that accumulated cash will be invested at some point in time. When the wave starts to develop, we must pay close attention to where it is going.
Carl Gambrell
