BlackRock - a new addition to our international equities manager line-up

At ANZ Investments, we continuously monitor each of our external managers’ performance, strategy and investment process to ensure we have the most appropriate investment managers for each asset class. This means, from time to time, we may make changes to our manager line up.

Recently, we made a change to one of the four managers we use for international equities. We replaced MFS Institutional Advisers (“MFS”) with a new strategy developed and managed for us by BlackRock Investment Management (Australia) (“BlackRock”). Our other managers for this asset class are Franklin Equity Group, Vontobel Asset Management and LSV Asset Management.

BlackRock is a wholly owned subsidiary of BlackRock Inc, the world’s largest asset manager, with US$10 trillion under management—. It scores well in our fund management assessment pillars of having a strong and stable parent, investment philosophy and process, people and culture, integration of responsible investment approach and performance.

Unlike the MFS strategy before it, which adopted a bottom-up stock picking approach, the BlackRock strategy takes a factor-based approach. It builds a portfolio selecting companies based on common characteristics or ‘factors’. The factors that BlackRock use are Momentum, Value, Quality, Size and Low Volatility. Its approach seeks to identify patterns, or traits, which have historically driven higher returns, focusing less on individual companies and more on broad groups of companies which share those factors.

Source: BlackRock 2023 website. For illustrative purposes only.

The performance of the various factors over market cycles shows why a dynamic approach to factor allocation can make a difference.

• Momentum: Focusing on companies that have recently gone up in price, with the hope they’ll continue rising.
• Value: Focusing on companies deemed to be cheap or undervalued compared to their earnings or assets.
• Quality: Focusing on companies with strong balance sheets, consistent earnings, or good management.
• Size: Focusing on companies that might grow faster than larger, well-established companies.
• Low volatility: Focusing on companies which tend to fluctuate less in price, thereby reducing risk.

BlackRock will move into and away from certain factors at times when they believe it’s favourable to do so, depending on economic and market conditions. It’s a systematic approach to investing, meaning it’s a quantitative investment process which emphasizes data-driven insights.

It’s worth noting that the BlackRock strategy is actively managed, aligning with our view that this approach will deliver better outcomes for our investors over the long term.

Adding a factor-based approach to our stable of international equities managers, two of which take a bottom-up approach and one which has a quantitative approach with a focus on value, will provide diversification benefits.

It will help spread risk, capture additional return opportunities and ensure our overall international equities strategy stays balanced. By combining the different approaches, we believe we’ll get a more resilient and well-rounded investment offering which reduces the reliance on individual manager skill.

It’s our view that removing MFS and replacing it with the new BlackRock strategy will deliver better outcomes for our investors going forward.

Firstly, our revised approach will help reduce and diversify active risk, giving us greater confidence in achieving our investment goals and delivering value for our investors.

Secondly, the number and breadth of holdings in the BlackRock strategy will be greater at around 250-300 holdings, versus the 80-100 that MFS used to hold. While this will increase the total number of holdings in international equities to around 500-600, this is out of a universe of over 2,700, meaning we maintain a targeted approach overall.

Finally, and perhaps the most obvious change, is that it has resulted in a much higher weighting to the so-called ‘Magnificent 7’ companies – namely Apple, Alphabet, Tesla, Microsoft, Meta Platforms, Amazon and Nvidia. An underweight to these companies has detracted from returns in recent times, when many of these companies delivered strong gains given AI (artificial intelligence)-related themes. We would point out however that while the BlackRock strategy is around 40% of our overall international equities exposure, we continue to take an active view on these companies across our four managers.

This change to our international equities manager line up is separate to our recently announced partnership with BlackRock, which you may have read about in the media.

Under the partnership, BlackRock will provide ANZ Investments with risk management and support services, as well as access to its global team of investment and risk experts. A part of this is that BlackRock will help with such things as foreign currency hedging, rebalancing and liquidity management. While helping with the provision of these services, it’s important to realise that investment decision-making, oversight and accountability remains with ANZ Investments.

Having access to BlackRock’s global team adds another layer of investment experience and insights to better inform our team’s decisions, and we believe this collaboration will only improve outcomes for our investors.