Across the asset-management universe, the explosion of volatility in Q4 hammered returns of hedge funds, CTAs and actively managed mutual funds as the world's most "sophisticated" investors found themselves woefully unprepared for the return of two-way volatility following eight years of central-bank induced placidity.
But as we reported at the time, out of the chaos, one clear winner emerged: Passively managed funds - specifically BlackRock, the world's largest asset manager and also a pioneering provider of low-cost passively managed ETFs. While LPs were yanking money from hedge funds in November, some $25 billion flowed into BlackRock's ETF business - a record monthly haul for the company, which manages more than $6.4 trillion.
At the time, it seemed like just the latest piece of evidence that passive investors' dominance over the investment landscape would outlast the era of QE in spite of the old investing adage that active management typically outperforms when markets are volatile.
But the inflows didn't matter much to investors, who aggressively dumped BlackRock's shares over anxieties that the volatility would harm the profitability of asset managers. The company's shares ultimately shed roughly one-third of their value from their all-time peak, according to Reuters.
Fast forward to Thursday, when Reuters reported that in its latest effort to contain costs, BlackRock would shed 500 jobs - equivalent to roughly 3% of its global workforce - part of an effort so "simplify our organization."
BlackRock Inc., the largest fund manager in the world, plans to cut 500 jobs, or 3 percent of its workforce, in coming weeks, according to a memo reviewed by Reuters on Thursday.
"We are always looking for ways to improve how we operate, to simplify our processes and structures, to prudently manage expenses, and to accelerate growth," said BlackRock President Rob Kapito in the memo. "The changes we are making now will help us continue to invest in our most important strategic growth opportunities for the future."
Kapito said the company wants to continue to invest “while key competitors will be playing defense” in areas including high-growth markets, technology and improving how the company works with clients. The company will also focus on key products, including exchange-traded funds (ETFs).
He added that the company’s headcount will still be 4 percent higher than a year ago after the layoffs. The job cuts are not concentrated in any one geographic region or unit, according to people familiar with the moves.
While the firm tried to sell the cost cuts as part of a strategic repositioning, we have a feeling there's more to the story, given that the announcement follows so closely behind rival ETF giant State Street's decision to excise 15% of its senior management.
The missing piece, of course, is the fact that while more money is flowing into BlackRock's coffers, much of this money is being allocated to low-fee passive funds as ETF providers continue their hypercompetitive race to the bottom on management fees (some of BlackRock's cheapest funds charge just 3 basis points a year).
In another interesting coincidence, the Financial Times reported on Wednesday that BlackRock was promoting Mark Wiedman, the head of its ETF business, to a new role that would set him up as the anointed successor to founder and CEO Larry Fink.
In the FT article about Wiedman, a KBW analysts argued that despite the drop in BlackRock's shares, the company remains "the single best-positioned" asset manager in terms of its potential for long-term growth.
"In our view, BlackRock may be the single best positioned to generate good organic revenue growth into 2019 and has the potential to improve from more lacklustre levels in 2018," KBW said in its annual outlook for the sector.
"The resurgent ETF flows in a difficult quarter we think highlights the resiliency of BlackRock’s overall business and, while fears of price compression have reared their head once again, we believe BlackRock remains well positioned to use its scale to drive profitability and the ETF secular trend remains intact," its analysts argued.
But kind words aside, the decline in BlackRock's share price last year would suggest that the market doesn't feel the same. And with good reason: Because despite the record inflows to BlackRock's products during the month of November, "fee compression" is beginning to wear on margins.
Put another way, the more money that is pulled out of active funds and poured into passive management, the more financial services industry jobs will be at risk.