Investing

BlackRock Counts on Jocular Ex-Trader to Boost Muni Business

(Morningstar Direct)

(Bloomberg) -- Not long after Pat Haskell took over Morgan Stanley’s municipal-bond department in 2013, he handed out rubber bracelets with the letters “EFD.” He wanted his team to bring their best every f---ing day.

And it worked — during his tenure, the business rose in client rankings and found new ways to deliver revenue.

Today, Haskell is trying to fire up another group, this time as BlackRock Inc.’s head of municipal bonds. A key challenge facing the 52-year-old executive is how to reverse severe outflows from actively managed mutual funds after bouts of underperformance.

Investors have pulled roughly $13.7 billion from those BlackRock muni funds on a net basis since 2020 and its market share has dropped, according to Morningstar Direct data. Although performance has improved in recent months, the outflows have continued.

“BlackRock as an investment complex has come under fire this year from fund flows, competition and even outside activists,” said Eric Kazatsky, senior US Municipals Strategist at Bloomberg Intelligence. “Haskell has his work cut out for him to reinvigorate investor confidence on the open-end fund side, which continues to lose assets to alternatives.”

As the world’s largest asset manager, BlackRock is an investing behemoth with a suite of products ranging from traditional mutual funds to low-cost, exchange-traded options. The firm had $185 billion in municipal-bond assets under management as of the first quarter, up from $163 billion at the end of 2019. Much of that growth has come from funds that track indexes, known as ETFs, including MUB — the largest in the muni market.

Haskell’s appointment parallels a bigger push at BlackRock to encourage investors to rely more heavily on actively managed funds that account for 26% of its $10.5 trillion in assets under management. Unlike funds that simply track the market, actively managed funds have professionals combing through thousands of securities to identify opportunities and manage risks. They also charge higher fees, which means customers have little patience for poor results.

Haskell declined to comment. Spokesperson Christa Zipf said the firm has made changes to improve performance over the past five years and pointed to its history and scale in muni bonds.

Bagpipes and Beers

Haskell took the reins earlier this year from Peter Hayes, who retired after nearly four decades managing US state and local government debt. In his role, Haskell oversees active muni strategies for retail investors and institutions as well as a group that handles portfolios for insurers. It is still early in his tenure, but he has revamped a business before.

When he became head of Morgan Stanley’s muni-bond operation, it was trailing Wall Street rivals and needed to work better with Smith Barney, the wealth management business Morgan Stanley had just finished buying.

Haskell integrated the retail and institutional desks to create a more effective team, said Nigel Key, who ran muni sales at the time. Within five years, Morgan Stanley was tied for first place alongside Citigroup Inc. in a Greenwich Associates client survey, and the wealth business had become one of the muni department’s biggest customers.

“He was able to forge an incredibly tight relationship with management on the Morgan Stanley wealth platform,” said Key, who hired Haskell out of college for a job selling munis at Credit Suisse First Boston.

Raised outside of St. Louis, Haskell was a defensive lineman at Union College before entering Wall Street. Associates describe him as gregarious with a strong personality — someone who could command a room and is good at motivating employees, but demands accountability.

He often roamed the trading floor, standing behind staff during big muni-bond auctions and economic data releases. On St. Patrick’s Day, Haskell hired bagpipers to play in the office and after a long week he was known to bring staff to Hurley’s, a saloon next to Morgan Stanley’s headquarters in Manhattan’s theater district.

“He knows how to dangle that carrot,” said Bernie Costello, Morgan Stanley’s head muni trader from 2015 to 2023, who is now at FMSbonds Inc. “Sometimes you need the stick and he can definitely wield it. He’s not a wilting violet, that’s for sure.”

Haskell is also known for pranks.

In one instance, he spied a co-worker sitting on a balance ball at his desk instead of chair. He snuck up behind the employee with a pair of scissors and popped the ball, sending his friend tumbling, people familiar with the incident said.

BlackRock hired Haskell for his “proven qualities as a client-centric leader, team builder and as an innovator who embraces the power of technology to create value for teams and clients,” said Zipf.

Active Outflows

Haskell is savvy about markets and ways to crank out fresh revenue, according to people who have worked with him. For example, he launched a trading algorithm for munis at Morgan Stanley. In another instance, he convinced management to make a risky-but-profitable bet on Puerto Rico bonds in 2019.

He will now have to use those skills to get BlackRock’s actively managed muni mutual funds business growing again.

After spells of weak returns, all but one of BlackRock’s nine actively managed muni mutual funds outperformed their peer group median this year through June, with four in the top decile, according to Morningstar. Nonetheless, investors pulled $1.7 billion from those funds this year through May, even as muni mutual funds overall took in more than $11 billion.

Most of the outflows have come from the two largest funds in Haskell’s group, Strategic Municipal Opportunities and National Municipal, which both had trouble managing interest rate volatility during the pandemic and after.

Strategic Municipal Opportunities had a $3 billion short position against Treasuries going into the pandemic as a hedge against rising interest rates, which backfired when investors piled into the safety of government debt. It suffered again in 2023 due to investments in Puerto Rico Electric Power Authority bonds.

In the five years through June 30, Strategic Municipal Opportunities’s performance was worse than most of its peers within its class of municipal funds, according to Morningstar. It has lost about two-thirds of its assets since late-2019.

National Municipal was hurt by holdings in bonds that had long maturities and low coupons once the Federal Reserve started boosting rates to tame inflation. Those positions caused the fund to lose 10.2% in 2022, a more severe loss than most category rivals, according to Morningstar. The fund ranks below most intermediate duration funds over five years.

In aggregate, investors have pulled money from BlackRock’s active open-end muni funds every year but one since 2020. Active muni funds overall have lost assets in just two years 2022 and 2023.

In May, BlackRock dismissed nine of the 55 employees on the muni team, a person familiar with the matter told Bloomberg News. Zipf, the BlackRock spokesperson, said BlackRock is always organizing its teams to better serve the market and improve performance.

Some former colleagues say they are sure Haskell will prove himself at BlackRock, given his track record.

He will “bring something fresh and different,” said Costello. “He’ll be grabbing the wheel in short order and doing the things he needs to do to to win.”

©2024 Bloomberg L.P.

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