Scientific approachtakes BGI to the top

Scientific approachtakes BGI to the top

By Deborah Brewster

Published: November 9 2006 02:00 | Last updated: November 9 2006 02:00

Blake Grossman is a man hardly anyone has heard of - which is rather odd, since he heads the largest money management firm in the world.

Barclays Global Investors, the company where Mr Grossman has been chief executive since 2002, has appeared to come from almost nowhere.

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In the past six years it has grown by $800bn - an amount that took rivals Fidelity and American Funds 40 years to accrue - bringing its total to more than $1,600bn. Its internal stock trading network would rival the world's biggest stock exchanges in size.

The group, which is owned by UK-based Barclays bank but based in San Francisco, is at the centre of a new wave of money management that dispenses with individual decision-making in favour of indexing and computer-driven methods to pick stocks and bonds. BGI uses only these quantitativetechniques.

It is also at the forefront of another big trend, which is seeing investors put their money either into low-cost indexing, paying a fraction of 1 per cent to replicate market returns, or into complex hedge fund-like strategies that charge high performance fees.

BGI's growth has been powered by a single product it helped popularise, exchange traded funds (ETFs). ETFs - index funds that trade on the stock market - have seen their assets grow from $5bn to $500bn in a decade, and BGI is the biggest manager. There are now 600 ETFs worldwide, according to Morgan Stanley, which predicts the market will grow in the next five years to more than $2,000bn.

The ETFs and a robust business managing indexed money for institutionalclients have kept BGI's growth humming. But this business is low-margin and highly competitive.

BGI wants to do something quite different: make its name as an active money manager. These assets comprise 22 per cent of its total, but generate 60 per cent of the profit, which explains why the company is so eager to grow them. BGI's contribution to Barclays has risen to about 10 per cent from only 3 or 4 per cent five years ago - and Barclays wants more.

BGI has especially set its sights on fixed income - an ambitious target that would see it take on market leaders Pimco, BlackRock and Wamco. Few money managers are able to outperform in both bonds and equities, but BGI believes it can break the mould.

"We see a revolution going on in the fixed-income markets. The degree of liquidity has just been exploding, the degree of transparency, the amount of data that is available - the opportunity has just exploded. We expect to get a lot more long-only mandates [in fixed income], and also long/short mandates," says Mr Grossman.

The growth in data is especially important to BGI, whose quantitative management style needs reams of data to calculate correlations in deciding when and what to buy.

Mr Grossman believes other equity managers have not done well in fixed income because "they don't have an extendable, scaleable investment philosophy. They have idiosyncratic talent which can be very successful in investment performance, but if you don't have successful investment philosophy then it won't work".

The group is at pains to say that its scientific approach - which means a decision about whether to buy or sell a particular stock is made by a software program - does not mean that computers run the show.

"It is about our judgment," says Mr Grossman. "The creative work comes out of ideas, the questions we ask. We don't start with the data, we start with the insight and we use the data to tell us what to do about it."

BGI spends hundreds of millions of dollars a year in technology to support this.

He says: "We use the same toolkit to understand how markets operate and to validate the strength and the effectiveness of the investment ideas we have. That should be very extendable across markets . . . We've delivered very consistent top quartile performance in fixed income, in equities in currencies. Our track record supports us." BGI certainly has consistently outperformed in its active management, and its name now appears regularly among the top operators in asset management.

Peter Knez, who heads the fixed-income division, has hired about 80 people in the past two years.

He says bond markets are becoming more like equity markets, and he envisions that fees - lower for managing fixed income - will compress to eventually become the same.

"Our active fixed-income business doubled last year [to $70bn]. There's a lot of money around. We just got a $5bn mandate in one swoop. It's partly the oil. The central banks whose countries have large oil revenues are awash in money," he says.

BGI is already one of the world's biggest hedge fund managers, and Mr Grossman sees this as another lucrative area likely to grow. However, the group already charges hedge-fund like performance fees - 20 per cent - on about $80bn of its assets under management, which makes the growth of its actual hedge funds almost moot. Meanwhile, the sheer growth of ETFs will continue to deliver profits for BGI.

Mr Grossman points out these still have a small market share compared with traditional actively managed mutual funds.

"How big can we grow? There's a lot of scaleability because of the breadth, the number of products. Our typical active products hold hundreds of securities . . I just don't know the answer to how big we can grow,"he says.

Copyright The Financial Times Limited 2006