30/05/2012 - 10:47

Driving top-down investment a risky call

30/05/2012 - 10:47

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You have to wonder whether now is the right time for a major investment manager to completely upturn its business strategy.

You have to wonder whether now is the right time for a major investment manager to completely upturn its business strategy.

CHANGING horses midstream is one of the oldest mistakes in the management handbook, but pressure to make profits in difficult times is causing even the smartest people in business to try anything – which is what one of the world’s biggest investment managers is doing.

BlackRock, which manages an estimated $US3.7 trillion of other people’s money around the world, is shifting the way it makes investment decisions from what is called a ‘bottom-up’ to a ‘top-down’ model.

For most people the change sounds like management gobbledegook of the worst type, but it could be far worse than that if you apply the horse-switching analogy.

What New York-based BlackRock is doing is switching from its long-established approach of picking individual companies that it believes will perform well (bottom-up) to a process of analysing the wider economy, looking for major changes and trends, and then looking for stocks it believes will perform well in its view of the future world (top-down).

It might sound like a subtle shift in the business of picking winners but it is a far-reaching change that will severely test the systems and 10,000 employees of a global business.

According to BlackRock management, the reason for the change is that its traditional model of first looking for well-managed companies is not working any more. Its bottom-up, or ‘active equities’ model, has not matched the performance recently of its top-down, or ‘scientific’ model.

To an outsider, BlackRock looks to be trying to make two major changes to its business, neither of which is guaranteed to succeed, and both of which could prove to be destabilising. 

Firstly, it is saying that rather than seek out companies that make good profits and buy shares in them, it is going to seek out global economic trends and then look for companies that fit this top-down view of the world.

Secondly, it is asking its 10,000 employees, who have learned to do business a certain way, to change the way they think and act.

The reason behind BlackRock’s big change is that it is seeking to put some shine on the lacklustre performance of the funds it manages.

While boosting the performance of any business is an admirable goal, there is also the question of timing; and with the world (especially Europe) sinking deeper into a period of slow growth, or no growth, there could hardly be a worse moment to make a fundamental change to the way a business functions – especially as it is not failing, just not firing on all cylinders.

Worst of all, however, is a belief held by senior BlackRock management that its analysts (who are struggling to pick winners with a bottom-up strategy) can correctly identify global economic trends and then pick winners out of those trends.

Perhaps the clever chaps at BlackRock really do know the direction in which the world is travelling, and are smarter than the World Bank, International Monetary Fund, and assorted governments around the world.

But even if global trends can be correctly identified, it then comes back to picking winners out of the stocks exposed to those trends.

Whichever way the BlackRock strategy change is analysed, it looks like change for the sake of being seen to be doing something when perhaps it is best to do nothing and not try to outsmart the world.

Brazil’s blues

ANOTHER, and perhaps more interesting example of defying global (and market) trends can be seen in South America, where a number of countries, as if on a cue taken from past booms and busts, are starting to make their usual bad decisions.

Nationalisation of assets, particularly of mining and oil resources, is back on the agenda in Argentina, and has never left the to-do list in Venezuela.

But the country that’s starting to attract most interest as its resource sector struggles with the downturn in commodity prices is the one most similar to Australia – Brazil.

There are signs of trouble in the land that will host the 2014 World Cup soccer tournament and the 2016 Olympic Games, both in the way it is handling preparations for those events and in its wider economy, which is being hit by the traditional developing world problems of corruption, cronyism, and mistreatment of international investors.

However, the issue which best reflects a disconnection between Brazil and the rest of the world is the attempts of its government to manipulate the exchange rate – spending billions of dollars on attempts to drive the currency down – along with changes to official interest rates.

Government exchange rate manipulation can be a deadly game, particularly if big investment funds find a way to bet against the government – a game that the funds invariably win.

From an Australian perspective, the emerging troubles in Brazil are good news because international investors with an eye on mining opportunities are more likely to send their funds to Australia with its more gentle treatment of foreigners, proximity to Asia and an open currency market, largely free from government interference.

A hungry billion

ON the question of differences, there is an interesting gap opening between Australia’s big two of mining – BHP Billiton and Rio Tinto – and their Swiss-based (London-listed) rival, Xstrata.

While most interest in Xstrata, which counts the former Mt Isa Mines as one of its pre-boom trophies, is in its proposed merger with its commodity-trading associate, Glencore, a more interesting matter could emerge over the next few years – food.

Unlike BHP Billiton and Rio Tinto, a merged ‘Glenstrata’ will have a big food trading division that should, in theory, be a winner from China’s decision to switch from an export focus to domestic consumption and lifting the living standards of the country’s 1.2 billion people.

Or, as Glencore chief executive Ivan Glasenberg remarked last week when talking about Chinese growth, “We are going to struggle to feed China.”

Banking on Europe

IF in doubt about the break-up of the euro, then take a look at what European banks are doing in adopting a form of ‘covered loan’ approach to their business by matching loans to a particular country with deposits from that country. In other words, a break-up is already occurring in the commercial sector if not yet at a government level.

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“Never keep up with the Jones. Drag them down to your level, it’s cheaper.”

Quentin Crisp


STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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