BlackRock’s US$100 billion model makers are betting on megacaps

THE team responsible for assembling BlackRock’s model portfolios is favouring the stock market’s largest companies, potentially unleashing a flood of billions of US dollars into technology shares.

The investing giant, one of the biggest providers of the ready-made strategies followed by asset managers and financial advisers, is “pretty overweight” on megacap tech and growth-oriented names within its model portfolios, according to Tushar Yadava, a strategist with BlackRock’s Multi-Asset Strategies & Solutions. The fact that just a handful of companies have powered this year’s market gains has fanned concern about the rally’s sustainability. Yet it’s these firms that tend to have the strongest fundamentals to weather the Federal Reserve’s tightening campaign, he said.

“Going into year-end now, we’d much rather own the largest-cap names,” Yadava said on Bloomberg Television on Monday (Nov 6). “Sector by sector, if you throw a dart, we’d rather own the stock that’s in the larger-cap than the smaller-cap because that’s where we’re seeing the positive earnings revisions, that’s where the balance-sheet strength is, and those are the themes we want to own right now.”

Despite a turbulent few months, the tech-heavy Nasdaq 100 is still about 40 per cent higher in 2023, a dominant performance fuelled by the likes of Nvidia, Meta Platforms and Tesla. That group has powered the S&P 500 roughly 14 per cent higher this year as well.

BlackRock’s model portfolios have about US$100 billion tracking them. Salim Ramji, global head of iShares and index investments at the firm, predicted in July that the overall industry could grow to US$10 trillion over the next five years, from about US$4.2 trillion.

While BlackRock’s models briefly went underweight on equities after Silicon Valley Bank’s meltdown in March and the financial industry stress that followed, they started to “edge back into stocks” during the summer, Yadava said. Although the initial thinking was that the rally in the so-called Magnificent Seven tech stocks would broaden out, that has not happened, he said.

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Model portfolios are a booming corner of the money-management industry. They bundle funds into off-the-shelf packages and have gained popularity with advisers and professional managers alike. As a result, allocation shifts by the biggest providers are sometimes suspected to be behind dramatic flows of money.

BlackRock’s model portfolio team is not alone in the logic of gravitating towards the market’s biggest firms. Large tech companies do not need to tap the bond market as much as their smaller peers, insulating them from some of the pressure dealt by the Fed’s hiking cycle, according to BNY Mellon Wealth Management’s Alicia Levine.

“I still think you have to be in large-cap tech. Large-cap tech America is about growth without needing to borrow, so that’s an important story and that’s part of the reason this sector rallied so hard the first part of the year as the Fed was hiking,” Levine, the firm’s head of investment strategy, said on Bloomberg Television. BLOOMBERG