“This is the beauty of humanity: We adapt, we evolve, we move forward.”
In Larry Fink‘s vision of the future, people rise to the challenge, whether of climate change and COVID-19, or short-termism and populism, and through innovation and ingenuity build better outcomes.
In a wide-ranging conversation hosted by CFA Society Toronto and moderated by former Bank of Canada deputy governor Lynn Patterson, the chair and CEO of BlackRock, the world’s largest asset manager, offered his perspective on today’s most pressing global dilemmas.
Fink’s outlook was both realistic and positive: He expressed hope about a COVID-19 vaccine and made a compelling case for long-term optimism, albeit with a healthy dose of short-term pessimism.
“I bet on humanity and I bet on success and I bet we’re going to have a brighter future,” he said. “We do solve problems when humanity gets its head around them.”
Climate Risk as Investment Risk
“We are seeing huge evidence that climate risk is becoming investment risk and we are seeing investors worldwide are now demanding a sustainable lens.”
In his influential “Letter to CEOs” earlier this year, Fink sounded the alarm about the risk climate change posed to the markets. He pledged that BlackRock would exit investments in companies that “present a high sustainability-related risk.”
He warned that climate change would reshape finance: “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
Since then, BlackRock has felt increasing demand for and interest around environmental, social, and governance (ESG) and climate-focused investments. “We are seeing a flood of inquiries worldwide that more and more investors are looking at all investing through a sustainable lens,” Fink said.
And what does he say to the skeptics who question whether ESG investments can perform?
“Eighty percent of our investable products that have an ESG and climate bias have outperformed their regular indexes,” he said.
How is climate risk investment risk? Fink pointed to California. Since the beginning of the year, more than 8,500 wildfires have burned more than four million acres in the state.
“The insurance companies are trying to raise their rates because their reinsurance rates are going up,” he said. “The persistence of fire is now changing the cost of home ownership because your home insurance is going up.”
That’s why companies that still have “their leadership heads in the sand” when it comes to climate change and investment risk will be smaller companies, Fink warned. “If you just look at the price/earnings (PE) ratios of some of the energy companies that are in the alternative space versus traditional hydrocarbons, you’re seeing a real transformation,” he said. “This is going to continue.”
Building Firm Culture during COVID-19
As the head of a global firm with trillions in assets under management (AUM) and 16,000-plus employees, Fink thinks a lot about company culture and that is especially true amid the coronavirus pandemic.
Echoing his recent comments at the Morningstar Investment Conference, he expressed concern about how remote work is affecting office culture.
“I spend a high percent of my working time at the firm on culture,” he said. “Culture is what binds you, what connects you. I do worry about remote working and how you can continue to build culture.”
If you want to appeal to the top talent, Fink believes you have to create a place where young people want to work.
“The great companies, the ones that are trading at better PEs than their peers, are the ones that are consistently being that voice for their industry, or that voice for the clients, or the voice for their products,” he said. “They are consistently attracting the best and the brightest who want to be in that industry.”
Part of creating that appeal comes down to a more holistic view of the business and who it serves.
“The greatest companies in the world are focusing on their stakeholders,” he said, “And through a consistent stakeholder focus that creates durable long-term profits, your shareholders, your owners, are going to benefit.”
Populism = Short-termism
Fink acknowledged a general sense of trepidation when it comes to investing.
“Right now, we are fearful. There is an absence of investing,” he said.
And that absence of investing can be seen at both the governmental and individual level.
“In the future, if we have a government leader focusing on these types of needs, we are going to need a lot of capital to restructure our economies,” he said.
That will require forward-thinking leadership that keeps its eye on the long term.
“The problem we are witnessing throughout the world is the rise of populism, which is a short-term reaction,” Fink said. “We are seeing less long-term behaviors out of governments than ever before and there lies one of the fundamental problems.”
Planning for the next fiscal year or the next election cycle is not taking the long view.
“We are going to need leadership throughout the world who are focusing on 10- and 20- and 30-year outcomes and the outcomes may not be realized during their term,” he said. “Those are going to be the important leaders of tomorrow.”
Short-Term Pessimist, Long-Term Optimist
The interplay between optimism and pessimism is what propels success and progress, according to Fink. That’s why he describes himself as both an optimist and a pessimist.
“I am a short-term pessimist,” he said. “I believe it’s through the conversation of pessimism that we solve problems and so, when we are not pessimistic, when I see problems that are occurring that we are not talking about, then we have a bigger problem.”
The US retirement crisis is one such problem and it reflects the short-termism he described above. People are not investing in their futures. “I call it ‘the silent crisis,’” Fink said. “But I’m a long-term optimist, because it’s through that pessimism that we solve problems.”
Fink joined the chorus of those preaching the benefits of compounding, staying the course with your investment portfolio, and focusing on the long term — particularly at a point in history when lifespans are increasing.
“You need to be invested all the time. It’s about compounding,” he said. “I also believe humanity is going to live longer and longer and longer, and I don’t understand why anyone would retire at 55 or 60. Especially statistically now in America. A couple of 60-year olds — one of them is going to live to 90. That means a third of your life, or your spouse’s, will be in front of you. Why retire?”
The implication of longevity is that investors need to have long-duration assets and a hefty skew towards equities.
“For a 20-, 30-, 40-, 50-year-old person, you need to have 70% of your investable portfolio in some form of long-duration assets,” Fink said.
Why do we have a retirement crisis? It comes down to our focus.
“We have under-invested in ourselves, in our mortality, in long-dated livelihoods, and been too focused on the short-term pessimism,” Fink said. “We are not focused on the long-termism of humanity.”
ETFs are not just a product.
“I believe ETFs are going to become a larger and larger component of all investing, both bonds and equities.”
One tool that can help address the retirement crisis is the exchange-traded fund (ETF).
Fink is a firm believer in ETFs and expects the growth in ETF investing will only accelerate. He also dismissed the notion that passive investors are driving this expansion.
“It’s not passive versus active. That’s the myth,” he said. “It is simpler to get your equity exposures through an ETF, and it’s entirely more simple to get your fixed-income exposures through an ETF.”
To illustrate his point, Fink compared ETFs to internet shopping.
“[The] ETF is a technology, it’s not just a product,” he explained. “Why do people buy on the internet? You have price transparency, lower pricing, convenience. There’s nothing technologically great about it other than it’s got everything at your fingertips: convenience, pricing, and transparency. And that’s what an ETF is versus all mutual funds. They’re generally cheaper in value, you have total transparency, and in the US, there is a tax advantage. And you have convenience.”
This is especially true for fixed-income ETFs and Fink believes the ETF’s full transformational effect will be felt in that space.
“To own a bond portfolio, you need to own 2,000 bonds to mimic the index,” he said. “You can own four bond ETFs to have 97% to 98% of the tracking error. And what that means is more and more bond investors — and I could make the same analogy for equities — are using ETFs for active investing. It’s not about passive and active anymore, it’s about convenience, price transparency, liquidity.”
The Beauty of Humanity
Despite the challenges, Fink is hopeful about the long-term outcome from the coronavirus pandemic and the ingenuity it has spurred.
“I am so optimistic that we, as human beings, have learned to adapt and to navigate our lives as best we can,” he said. “There will be so many changes in how we live our lives going forward and most of them are going to be positive.”
The medical advances that coronavirus-related research generates could be spectacular.
“If we actually create and find a vaccination for this virus, could it mean we find vaccinations for the regular cold, which is a form of coronavirus, too?” Fink asked. “That is the beauty of humanity: There are very few times when we don’t fix problems.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image courtesy of BlackRock
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