How BlackRock, the world’s largest fund manager, navigates market chaos – and a bad ESG reaction

Mark Wiedman, Senior Managing Director, Head of International and Corporate Strategy at BlackRock, September 7, 2022.Fred Lum/The Globe and Mail

Nothing seems to make much sense anymore, at least not in the financial markets.

Central banks in Canada and Europe made more outsized interest rate hikes this week, and in the United States, Federal Reserve officials hinted they were ready to trigger themselves. another major increase. But instead of being scared, equity investors sent markets higher – this after selling stocks for three straight weeks because they feared this very scenario.

At the same time, the environmental, social and governance (ESG) principles that have dominated investment decisions over the past five years have generated some furor – particularly the principles relating to climate change, strongly advocated by the largest fund manager in the world, BlackRock Inc of New York. .

In the midst of such chaos, there is a human desire to find meaning and restore order. But take it from BlackRock, with US$8.5 trillion under its watch, this time there are no easy answers. Just as the COVID-19 pandemic has made us reconsider how and where we work, it is also reshaping how the global economy and financial markets work – and there is no turning back.

“We are ending a 40-year period of steady easing in monetary conditions,” said Mark Wiedman, head of international and corporate strategy at BlackRock and one of the top candidates to succeed chief executive Larry Fink. in an interview at the company’s Toronto office. “What has essentially been a price signal for companies to borrow and go into debt – it’s over.”

BlackRock and RBC see growing demand for fixed income ETFs as investors seek safe havens

Mr. Wiedman has touched nearly every aspect of BlackRock’s operations during his nearly two decades with the company, and prior to his current role he was the global head of iShares and index investing, the division which turned BlackRock into a financial juggernaut. Because of his experience, he rubs shoulders with the most sophisticated investors in the world, including those from his own boutique.

So when he says the chaos won’t subside for a while, that’s a wake-up call. Investors hoping to wait on the sidelines, perhaps in an ultra-secure GIC, may be twiddling their thumbs for quite a while.

The good news for the global economy, he points out, is that U.S. unemployment hit a half-century low in July. But Mr. Wiedman was in Europe recently, and he couldn’t quite believe the difference in attitudes between the continent and North America.

“Canada and the United States are facing similar macroeconomic headwinds, particularly with respect to inflation and the shock of rising rates,” he said. “The biggest problem is the overstimulation in the United States which has resulted in a small excess demand. It will work over time with higher rates, but that’s not an existential problem.

“It’s nothing compared to the energy shock that is rocking Europe,” he said. “We are facing a winter when German industry may have to shut down.”

When it comes to financial markets, stock prices and bond prices fall at the same time, which is not supposed to happen. Typically, investors abandon equities when they are scared and seek refuge in bonds. The only times in recent history when the prices of the two assets have fallen in tandem are pivotal times, such as when Britain left the gold standard in 1931 and when the United States entered World War II. world.

That this is happening now raises serious questions about the traditional portfolio composition of 60% stocks and 40% bonds. “Is the 60/40 portfolio dead? I would say probably,” Mr. Wiedman said.

He doesn’t know what the new combination should be – no one does, really – but he puts it this way: if a wallet looks the same as it did before every other unique gen shock, “you could I want to think about it a little harder.

All of this uncertainty has serious consequences for BlackRock, which built its name on the back of low-cost exchange-traded funds. Rocky markets are forcing investors to reconsider how much money they should have at risk.

BlackRock is still seeing net inflows into its ETFs so far, meaning more money has been invested than withdrawn in the first half of its current fiscal year, and Mr Wiedman said there still had a long way to go before there was a balance between ETFs and other financial products, such as mutual funds, in client portfolios.

But in this market, BlackRock is particularly fond of two assets, both outside its historic wheelhouse: private credit and infrastructure.

Asset managers of all stripes have been pushing alternative investments – private credit, infrastructure, private equity and real estate – for nearly a decade now, as they have delivered stellar returns in an era of incredibly low bond yields. But now that interest rates are rising, there are fears that the entire alternative investment asset class has lost its tailwind, making BlackRock’s push risky.

Mr. Wiedman does not deny that there will necessarily be changes. Private equity is most sensitive in the current environment, he said, in part because low rates have made it so easy for private equity firms to fund highly leveraged buyouts. “It’s an open question whether we’ve had regime change,” he said. “It’s a hot debate within the company.”

But BlackRock is confident in private credit because banks can no longer lend as they used to. Since the global financial crisis of 2008-2009, banks’ capital levels have increased and leverage ratios have fallen. Yet there are still as many loan applications, if not more. “Credit has moved from bank balance sheets to the portfolios of asset managers,” he said.

Infrastructure, on the other hand, is closely linked to climate change. “The demand for infrastructure, especially infrastructure for a low-carbon economy, is going to be huge – and it’s hugely capital intensive,” he said. Companies like BlackRock, Toronto’s Brookfield Asset Management Inc. and Canadian pension funds have large sums of money to help build gas pipelines and electric car charging networks.

Another growth driver: sustainable investing, particularly through BlackRock ETFs. “We’ve had more interest than ever in investing in sustainable products,” Wiedman said, adding that this category is driving 20-25% of the company’s growth. In Europe, it includes almost all of BlackRock’s growth.

That BlackRock sees so much promise in sustainable investing is at odds with a growing backlash against ESG. Some critics, including Republican Comptroller of Texas Glenn Hegar, blame these principles for the global energy mess because oil and gas companies are being punished for increasing production.

And because BlackRock has spoken so much about climate change, it has become the target of much of the anger. In late August, Texas blasted BlackRock for an alleged “boycott” of energy companies and threatened to bar its public funds, including pension plans, from investing in the asset manager.

Mr. Wiedman oversees BlackRock’s sustainability task force, and for him there is no looking back. “The demand for oil is going to go down, and a lot of people don’t want to hear it,” he said. “It’s not created by wokeism, it’s not created by climate activists. It is created by market forces.

Certain elements of the Republican Party, he said, “have polarized and used this as a pet peeve, a hobgoblin to try to rally around, when in reality the underlying substance is completely specious and empty.” .

“I drove an electric truck in Sweden last week, a 44-tonne electric truck,” he said. “They are coming. They are really coming.

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