BlackRock finds assets aren’t enough in bid for clout

April 3, 2012 04:44 PM
Campaign afoot to make BlackRock brand better known

April 3 (Bloomberg) -- Laurence D. Fink, who built BlackRock Inc. into the world’s biggest asset manager, now is seeking to increase the firm’s clout beyond Wall Street to the wider public.

Fink is pushing for reputational heft with investors, regulators and peers, as the adulation received by rival Pacific Investment Management Co. has eluded the firm he co-founded in 1988. He’s started a campaign to make BlackRock’s brand better known, and is asserting its views on pivotal issues including money-fund rules and the dangers of complex exchange-traded funds that are at odds with firms such as Fidelity Investments and Societe Generale SA. He’s seeking to become a champion of corporate governance, urging 600 companies where BlackRock has its biggest stakes in to adopt shareholder-friendly practices.

“People always asked me what do I care about the most for our company, and that’s an easy answer; it’s respect,” Fink, 59, said in an interview in his office at BlackRock’s New York headquarters. “Being the largest asset-management company in the world isn’t a stat that I actually care about. If we’re the most respected asset-management company in the world, that’s a pretty lofty position.”

Gravitas is crucial for BlackRock as it tries to bolster its reputation as an active money manager, woo individual investors and increase its share of the U.S. mutual-fund business, where it holds 2.2 percent of assets. While Fink built BlackRock into the world’s largest provider of exchange-traded funds, only about 6 percent of its assets are in actively managed U.S. retail funds. Fink has said building that business is a “big priority” for BlackRock.

BlackRock’s Diversity

BlackRock’s $3.51 trillion in assets include stocks and bonds, institutional accounts, hedge funds, passive strategies and portfolios that use mathematical models, giving it the broadest array of products among money managers. BlackRock has also been picked by government agencies in Europe including Greece, Germany, Switzerland and Sweden since 2008 to evaluate hard-to-value debt portfolios. The firm’s BlackRock Solutions unit was selected by the U.S. in 2008 to oversee tainted portfolios at the peak of the financial crisis.

“The core motive driving our brand campaign, our regulatory advocacy and our corporate governance engagement is our responsibility to our clients,” said Linda Robinson, a senior managing director and global head of marketing and communications for BlackRock. “That is the motivation and what is driving those actions.”

Pimco’s Followers

Although Newport Beach, California-based Pimco has less than half of BlackRock’s assets, its founder and co-chief investment officer, Bill Gross, is one of the most widely followed bond investment managers and analysts of Federal Reserve policy. Gross, who was named the fixed-income manager of the decade by Morningstar Inc. in 2010, posts monthly investment outlooks online and his postings are followed by more than 62,000 users of the microblogging site

Mohamed El-Erian, Pimco’s chief executive officer, wrote a book “When Markets Collide” in 2008 that was a New York Times bestseller, and regularly writes commentaries for newspapers and websites on topics ranging from the global economy to education.

Pimco, whose $252 billion Total Return Fund is the world’s largest mutual fund, controls 5.5 percent of the mutual-fund market, according to Strategic Insight, a research firm. Across the company, Pimco attracted $60 billion of client deposits in 2011 while BlackRock had net withdrawals of $13.7 billion.

‘Higher Profile’

Pimco’s parent, Allianz SE, ranks No. 2 globally, with $2.2 trillion, including $1.36 trillion at the unit run by El-Erian and Gross.

BlackRock acquired Barclays Global Investors in December 2009 to add iShares exchange-traded funds to the actively run stock and bond funds it oversees, more than doubling its assets. More than half of the firm’s assets were in iShares and other passive funds as of the end of last year.

Fink is “trying to create a higher profile for himself as an evenhanded spokesman on corporate governance in general and on the financial industry in particular, and he does that on the sheer size of BlackRock,” said Burton Greenwald, a mutual-fund consultant in Philadelphia.

Gross’s Misstep

Gross’s visibility does have its downside. He missed a rally in U.S. Treasuries last year, which resulted in his Total Return Fund lagging behind 69 percent of peers and prompting the fund’s first year of client withdrawals even as clients put money into other Pimco products. Gross wrote a letter to clients entitled “Mea Culpa,” in which he called 2011 a “stinker.”

Performance at U.S. mutual funds managed by BlackRock may stand in the way of the firm’s ambitions. In the three years ended Feb. 29, BlackRock’s actively managed funds on an asset- weighted basis trailed 60 percent of their peers, according to data compiled by Morningstar. During the same period, Pimco beat 59 percent of its peers, Morningstar data show.

Over the past five years, BlackRock did better compared with many peers, beating 63 percent. Pimco’s over that period outperformed 91 percent of peers, data from Morningstar show.

BlackRock said the comparison doesn’t reflect the more diverse and global nature of its business, and doesn’t factor in its institutional and non-U.S. mutual funds. Across all of its actively managed strategies globally, 74 percent of assets outperformed benchmarks or peers over five years, according to the company.

Performance Not ‘Terrific’

BlackRock has had “a lot of changes at the top, but what you haven’t seen is this being synthesized into terrific performance,” said Eric Jacobson, a senior analyst at Chicago- based Morningstar, referring to BlackRock.

The firm’s first priority is delivering top performance for active funds, Fink said. At an event hosted by the UCLA Anderson School of Management and Bloomberg Television in November, Fink said he admires Pimco’s consistent long-term track record and influence. Gross’s Pimco Total Return returned an annual average of 8.3 percent in the five years through March 30, beating 98 percent of similarly managed funds, according to data compiled by Bloomberg. During the past 10 years, the fund gained 7 percent.

“I could give you pockets where we did really well consistently and areas not so well. However, the number one thing we have to be great at is performance in our alpha products,” Fink, who has been chairman and CEO of the firm since co-founding it, said in the interview last month. Alpha products seek to beat the returns of market benchmarks.

BlackRock’s Reputation

BlackRock has work to do to improve its reputation among some institutional investors as well. It was rated No. 4 by pensions and No. 9 by nonprofits, compared with Pimco’s No. 1 ranking for both, in terms of favorable impressions among prospective clients, according to a study released last month by Cogent Research that surveyed 650 pension and nonprofit investors with at least $20 million in assets.

The company, started in a one-room office in Manhattan with $1 billion in assets, achieved its ascent from a bond shop to a diversified firm managing stocks, bonds, hedge funds, index funds and ETFs by acquiring competitors. In 2004, it purchased State Street Research & Management for $375 million from MetLife Inc. and two years later it acquired Merrill Lynch’s investment unit for $9 billion, bringing its assets above the $1 trillion mark. BlackRock bought the hedge fund-of-funds business of Quellos Group LLC in 2008.

BlackRock’s first move into the spotlight came when it went public in 1999, raising $126 million in an initial offering.

‘Being Visible’

“I don’t like being that visible in the industry -- I much preferred the first 12 years when no one knew who BlackRock was,” Fink said. “But I don’t think I could stand there and say our voice could be silent anymore. Our scale, our visibility, our business model has given us a platform in which we need to have a voice on behalf of our clients.”

BlackRock’s shares have gained 40 percent since it announced that it would acquire Merrill Lynch’s investment unit in February 2006, compared with the 18 percent decline in the 20-member index that tracks asset managers and custody banks.

To make its views heard, BlackRock in February began its “new world” campaign, telling clients how to invest in an uncertain market, three years after Pimco coined the term “new normal” following the 2008 financial crisis. Fink last year said he didn’t share Pimco’s view on the post-crisis economy and theory of “new normal,” which describes a world of subdued stock and bond returns as growth slows in developed economies and emerging markets grow more dominant.

Ad Campaign

Four-page inserts appeared in publications including the Wall Street Journal and the Financial Times as part of BlackRock’s campaign. In a speech to the Council on Foreign Relations in February, Fink said the traditional mix of putting 60 percent of assets in stocks and 40 percent in bonds is inadequate in a market characterized by an aging population, a reduction in borrowing and risk-taking by individuals and governments, and a greater role of emerging economies.

BlackRock executives including Robert Kapito and Robert Doll have also been speaking publicly about how investors can be harmed by sitting in cash and focusing on short-term investing.

Kapito, a co-founder and president of the firm, told CNN Money last month that he has about 70 percent of his investment portfolio in dividend-paying global stocks. Both he and Doll, BlackRock’s chief equity strategist, have appeared on CNBC promoting equities this year. About 44 percent of BlackRock’s assets are in equities, which generated almost half of the firm’s revenue in 2011, or $4.4 billion, according to company filings.

Household Name

Becoming a household name is important because then it’s easier for brokers to sell BlackRock’s products to retail investors, said Luke Montgomery, a research analyst who covers asset managers at Sanford C. Bernstein & Co. in New York.

It’s prudent for asset managers to try to get retail dollars because more money is shifting to individuals with the move to defined contribution plans, where savers handle their own money, from defined benefit plans, said Jeffrey Hopson, a research analyst at Stifel, Nicolaus & Co. in St. Louis. There was $4.5 trillion in defined contribution plans as of Dec. 31, according to the Investment Company Institute.

“We’ve never had a campaign this retail-oriented and are now investing more in that brand,” said Fink.

BlackRock has also become more vocal about regulatory policies and taken positions that contrast with the views of peers in the industry in its quest to establish itself as a leader. The firm released a report last month outlining how regulators could make a floating net-asset value, or NAV, acceptable to money-market investors and managers.

‘Leadership Position’

BlackRock, which had previously opposed floating the NAV, said doing so wouldn’t cripple the product, putting it at odds with firms including Pittsburgh-based Federated Investors Inc. and Boston-based Fidelity.

“Some of this is getting in front of issues that have been long-term issues that no one has spent the time addressing,” Kapito said in an interview on March 13. “So why don’t we take a leadership position, go out and identify some of these issues, try to come up with solutions to these issues and get the industry to move in that direction?”

BlackRock oversaw $145 billion in U.S. money-market mutual funds as of Feb. 29, making it the seventh-largest manager, according to data compiled by research firm Crane Data LLC of Westborough, Massachusetts. Last year, money-market funds accounted for about 4 percent of revenue, filings show.

Synthetic ETFs

“I think of this as very welcome and appropriate from a firm like BlackRock,” Paul Schott Stevens, president of the Investment Company Institute, the Washington-based trade group that has opposed any additional changes to money-market funds, said in an interview. “I view it as a leadership exercise.”

BlackRock, the world’s largest ETF provider, in October called for better transparency and disclosure of ETFs that use derivatives. Almost all of BlackRock’s ETFs are backed by stocks, bonds or commodities they seek to track.

So-called synthetic ETFs, offered in Europe by firms including Societe Generale’s Lyxor Asset Management, introduce a layer of complexity and counterparty risk that investors may not be aware of, Fink said at a conference in November.

All Lyxor ETFs are fully regulated with levels of transparency and risk management that typically exceed regulatory requirements, Simon Klein, head of European ETFs at Lyxor, said in an e-mailed statement. Lyxor has said that BlackRock’s warnings distract from the risk associated with securities lending by physical ETFs, which is that a borrower will collapse and fail to return them.

‘Married With Performance’

BlackRock is also advocating for better corporate governance at companies it invests in. In January, the firm sent letters to 600 companies in which it holds at least 5 percent of the shares to adopt more shareholder-friendly practices. And BlackRock recently filed with the Securities and Exchange Commission to open a fund that excludes companies that have ties to countries where there are human rights violations.

The firm’s efforts won’t translate into results overnight, said Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island.

“Building awareness and creating a brand is years in the making, not weeks or days or months,” Bobroff said. “It ultimately has to be married with performance.”

Bloomberg News

--With assistance from Christopher Condon in Boston. Editors: Sree Vidya Bhaktavatsalam, Christian Baumgaertel

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