Known as a fixed-income manager, New York-based BlackRock Financial Management has changed its colors. Earlier this year, Pittsburgh-headquartered PNC Bank, which acquired BlackRock in 1995, consolidated its asset management capabilities under the BlackRock name. As a result, BlackRock has emerged as a major multi-product investment advisor that employs a hybrid approach to stock picking – using both quantitative tools and fundamental analysis.
Adopting the BlackRock identity are Philadelphia’s Provident Capital Management, which specializes in domestic value equities; PNC Equity Advisors, concentrating on growth equities; CastleInternational Asset Management, specializing in international equities; and PIMC Institutional Management, a liquidity manager. In addition, PNC’s Compass Capital Funds has been named BlackRock Funds.
While equity products are new to BlackRock branded offerings, the teams and investment processes that create them are not. Provident, for example, has been in existence since 1978. The small cap growth team has been led by Bill Wykle for eleven years. Collectively, the equity group manages more than $13 bn in assets. Altogether, the new group manages over $116 bn in assets.
The melding of PNC’s asset management operations aims to leverage marketing and operational synergies. ‘We wanted to cross-sell capabilities that have grown more complementary in terms of investment processes and philosophy,’ says Young Chin, formerly chairman of Provident and now managing director responsible for domestic equity strategy, management and research. ‘It makes sense to operate under a single umbrella. But underlying investment processes have not changed. We chose the name with the highest public recognition.’
As a result of the reorganization, equity investment professionals within the new BlackRock own some 20 percent of the company. All domestic equity operations are run out of Philadelphia.
Chin says the changeover was remarkably smooth. The roll-out began in November with a communications blitz with clients, investment consultants and broker-dealers. The challenge now is to assure the whole is greater than the sum of its parts.
Hybrid manager
With a fixed-income heritage, BlackRock understands the value of systematic processes and extends that management culture to equity offerings. A disciplined investment process across all strategies focuses on risk management and active security management. BlackRock portfolios use quantitative tools to structure weightings, screen stocks and add value while controlling risk.
‘We recognize the value of flying with instruments,’ says Chin. ‘The higher you fly, the more instruments you need. You are not necessarily being conservative. You are being prudent. Quantitative tools allow us to measure risks and rewards. We take advantage of the best of bottom-up analysis and quant techniques. Either one at the extreme brings sub-optimal results.’
The initial screening process uses quant techniques to identify value and growth criteria for the best universe of stock candidates. ‘Value investors, for example, want to identify attractively priced securities that can return to fundamental value,’ notes Chin. ‘But some names are cheap because they really are dogs. If you screen for the cheapest names, your portfolio may be exposed to undue sector risk. Companies need to be analyzed to distinguish true opportunities from lost causes. Otherwise, you can fall into the value trap.’
Meanwhile, country and currency allocation models are used for international mandates. Quantitative analysis – including economic regression models, fundamental valuation ratios and momentum indicators – is employed. Led by Gordon Anderson and based in Edinburgh, Scotland, the international team of ten investment professionals has worked together for over a decade and joined PNC in 1996. Analysis is divided over four geographic desks: Americas, Europe, Pacific Rim and emerging markets.
While quant-based risk and diversification control measures keep portfolios in line, each equity product has a lead portfolio manager who is the final arbiter of stock selection within their particular investment mandate. They are aided by analysts who study underlying company fundamentals and catalysts that could bring about favorable future valuations. Meanwhile, rigorous fundamental analysis of investment and company characteristics dominate the whole stock picking process. Throughout, BlackRock portfolios are constructed with a disciplined sell process and are closely monitored for consistency.
Subjective analysis
BlackRock uses two main styles of investment management: growth and value. Overseen by Chin, both investment teams exchange information but day-to-day management operations and investment philosophy differ.
The value team meets daily to share information. It looks at investment opportunities irrespective of company size, determining in which value-oriented portfolio a stock ought to be placed. Holding periods tend to be longer than those on the growth side.
For their part, growth team members have more ad hoc meetings throughout the day, so they’re lighter on their feet in choosing attractive opportunities. The growth team seeks companies with strong financials and short-term earnings sustainability. ‘Growth teams must move in and out of positions quickly to ensure they don’t hold securities that can drop dramatically,’ says Young. Accordingly, the growth team tends to meet more often with company managements, seeking information on earnings prospects.
While BlackRock analysts often visit New York, Philadelphia’s location near one pole of the Boston-Baltimore belt ensures BlackRock’s offices entertain a steady stream of senior management and Wall Street analysts. IROs and senior management of current BlackRock holdings are welcome to visit and update investment teams.
There is a place for almost any company in BlackRock’s various portfolios. ‘Our growth teams will look for the magic that will convince us the company will continue to outperform above market expectations over the next six to twelve months,’ says Chin. ‘That might include a change of management, new proprietary technology or some other sustainable competitive advantage. We try to separate them from those that have peaked.’
On the other hand, if a company has seen stock price weakness, and particularly if it has been downgraded by an analyst, the value teams would be more interested in taking a look. ‘Again, we are looking for the catalyst that management can bring to the table that will return the company to its intrinsic value.’
Chin says ‘there is always a fundamental reason for a stock being killed. Each stock has an analytical process to identify whether it is worth keeping in portfolios. Overall, all analysts seek catalysts that will drive valuations higher. We look for companies with management vision that can show us how its future differs from the market’s opinion.’
Sometimes, stocks may find a home in more than one portfolio. Chin points to one name found in the large cap growth, value and select portfolios. ‘The value team believes the market has overreacted to litigation facing the company,’ says Chin. ‘The growth team sees the same security in terms of its potential for growth over the near term irrespective of the negative news.’
While in-house research remains the bedrock of investment decisions, BlackRock’s style means it must keep close tabs on Wall Street research. ‘We partner with the Street to find investment opportunities and welcome their input,’ says Chin. ‘But we must uncover the incremental knowledge over and above what Wall Street brings to the table. Direct input from senior management is extremely valuable in that process.’
The activity surrounding annual and quarterly reports can strongly impact stock selection. During earnings season, equity teams work at a heightened level of activity. ‘We are always interested in getting a better feel on how others view the effect of earnings announcements,’ says Chin. ‘Earnings drive stock prices and short-term, whisper numbers are among the most important.’
BlackRock analysts carefully monitor investor relations officers and senior management for clues. They gauge various intangible measures such as how accessible investor relations departments are or the posture of senior management in and out of meetings.
‘We are in deep, uncharted waters,’ says Chin, who began his career some 20 years ago doing economic research for Harris Bank. ‘Equity performance has been sustained and many retail investors have never experienced a bear market. It is difficult to predict investor reactions to a market correction that shows no sign of recovering quickly. Unseasoned investors could flee the market in droves. In turn, valuations across the board would drop. But it is comforting to know that even with dramatic daily market swings, investors have not overreacted.’
