From silos to solutions
The announcement in mid-June that Barclays had accepted BlackRock’s offer for its asset management arm, Barclays Global Investors (BGI) - to be recommended to shareholders in August 2009 - set the media and industry analysts off on the challenging task of trying to find the pitfalls. All mergers present difficulties, particularly when they are on this scale, but it is difficult to imagine a better fit.
“Generally, speaking with clients across Europe since the agreement was announced, the message is that they think this is a merger of two strong businesses,” says Michael O’ Brien, managing director and BGI’s head of distribution EMEA. “This is about building a best-of-breed business across multiple alpha sources and beta indexation - and offering the ability to mix them.”
O’Brien was careful not to leave hostages to fortune with elaborate essays on how the pairing might approach the market - but any outside observer can take an informed guess at the outline. BlackRock has form: the fixed income manager did a pretty seamless job of building its alternatives and equity capabilities with successful acquisitions of Quellos and Merrill Lynch Investment Management, creating a formidable qualitative, fundamentals-based multi-asset offering that it has recently started directing into a variety of fiduciary management channels. BGI beefs up the systematic quants capacity, from hedge funds through high-alpha to plain-vanilla and complex beta (including the iShares ETFs), and brings a powerhouse in liability-driven investing and transition management to the all-important “solutions” suite.
“The solutions piece is big,” says O’Brien. “We have a big LDI business at BGI. At the moment the trustees go away and do their ALM studies and come up with an asset allocation with their consultants - asset managers have to meet them halfway on that with solutions that are made up from products, but which are framed in a language that starts to address the client’s problem. Increasingly clients are coming with their liability profile and asking us to outperform it by 2%, or creating mandates that are not MSCI World+2%, but inflation+5% or GDP+5%. That’s how clients frame their problem - the solution should be framed the same way.”
The vision seems to be that of a business that can deliver to multiple client segments in multiple jurisdictions, merging BGI’s solution-structuring experience with BlackRock’s portfolio construction expertise.
This is all very much about breaking down the asset-class silos that constrain the industry, as O’Brien observes, which might seem an odd emphasis for a firm renowned for its beta-packaging prowess. O’Brien stresses that the next big push is going to be exotic beta, which might include more recognizable beta exposures like frontier markets but also non-conventional asset classes or risk premiums like inflation or liquidity. The new entity should provide the platform to mix those betas with alpha streams into customized liability-driven portfolios. Does that sound like a one-stop shop?
“We’re a fiduciary,” says O’Brien. “But are we a fiduciary manager? No. We provide LDI - so we try to help clients understand their liability profiles and structure hedging mandates for those liabilities, but do we actually take on the Cardano and Mn Services-style mandates? No.”
But of course BlackRock does offer solutions along those lines, and is enjoying some success expanding them beyond their natural home in the Netherlands. Alongside the scale that the merger brings to some key sections of the retail business, it would seem a good bet that this will be an important aspect of the new firm’s campaign for European pension fund assets, should shareholders confirm the deal in August.