The business of retirement

The business of retirement

Asset management giant BlackRock is going big on the retirement cause, says president and co-founder Rob Kapito.

The story about BlackRock's beginnings goes like this. It was 1988, junk bonds were the rage, but the Fed was tightening. Many investors suffered serious losses.

A group of eight Wall Street bond experts gathered in a room with a shared telephone one morning to set up a new bond shop, believing they can help investors understand risk.

"We sat around, called everyone that we knew. By 10am we were finished. Everyone wished us good luck but no one gave us any business. . . someone told us, 'Just what the world needs, another bond manager'," recalls BlackRock's president Rob Kapito, one of the eight present. Nevertheless, the firm went on to raise its first billion dollars before the end of the year. And 26 years later, BlackRock is no longer "another bond manager".

It now manages US$4.5 trillion (S$5.95 trillion) in almost every asset class, fund product and security imaginable, be it US large-cap stocks, high-yield bond indices, emerging market sovereign debt or commodity-linked derivatives.

Its risk-management platform, Aladdin, looks after many more trillions of dollars held by other fund managers. BlackRock Solutions, the advisory firm where Aladdin is parked, reports growing revenue. Past and present clients include sovereign wealth funds and banks.

The US Federal Reserve and the government of Greece both hired BlackRock to figure out the value of their portfolios during their financial crises. In August, the firm was hired by the European Central Bank to advise on developing a programme to buy asset-backed securities.

While the firm manages money on behalf of people with a wide range of motivations, it is sharpening its focus on a timely topic: retirement. Mr Kapito says that US$3 trillion, or two-thirds of the sum, are managed for retirement purposes on behalf of individuals and pension funds.

"Retirement is the most important focus of the firm," Mr Kapito tells The Business Times in an interview in Hong Kong, where he is meeting clients in an annual event. Mr Kapito oversees day-to-day operations at BlackRock.

A confluence of longer life expectancies, low interest rates and a decline in defined-benefit pension plans is causing a seismic shift in retirement planning. Instead of corporations taking care of pensions, individuals now need to bear the risk for their own retirement in an environment where it is harder to get returns.

Insufficient retirement planning

There is increasing public interest in the field as a result. Asset managers such as BlackRock, whose revenues increase with the amount of assets they manage, are thus jumping in.

Mr Kapito prefers to frame the issue in terms of the company's fiduciary responsibilities to its clients.

"We need to make sure that they're aware and they understand how important it is. . . most of your colleagues are interested in writing about whether the Fed's going to raise interest rates or not, whether the market goes up or down, whether an activist investor is trying to take over a company. . . it's just gossip, and it's character, and it's story, but is it really long-term investing?"

Mr Kapito rattles off a string of statistics. "If you're born today in Hong Kong, your life expectancy is 83.8 years, and in Taiwan, it's 80.6. Even in emerging and recently emerged markets in Asia, life expectancy is increasing rapidly. . . millions of people around the world need to contemplate spending twice as many years in retirement as previous generations".

It is not refutable that people are living longer and have not saved enough for retirement and have to work longer, he says. "If they work longer, in a period of time when there's not a lot of jobs, they're not giving up the jobs to the younger generation. . . there's a social impact to all this. So the more we can get people to invest, so they can retire, give up their jobs to the younger population so they can start earning an income - the more it will help alleviate future government issues, because the government will have to help the older generation."

Global campaign

In October, BlackRock launched a global campaign focused on creating awareness on how people are planning to fund their retirements, called "The BlackRock Plan".

The campaign aims to target investors who are more conservative than average - those who are still keeping their assets parked in cash. In Singapore, for example, BlackRock's own survey of 1,000 investors found that they hold 46 per cent of their portfolios in cash.

Many of those investors said they would only invest if they have a guaranteed return from their investments. This situation is similar worldwide.

"I think people can invest in a conservative nature and still be good investors and get a good outcome," Mr Kapito says.

"We're not asking them to take more risk than they should take. But taking no risk and being in cash is certainly not going to achieve the desired outcome."

Other than advertising, BlackRock is holding information sessions with financial advisers, who are instrumental in recommending products to retail investors. It is also talking to regulators and even politicians on the importance of their cause.

In all, the company is spending a "fairly significant" amount for the campaign, which will go on for at least a year, Mr Kapito says. "There's so much sitting in cash, people are reluctant to get invested, that we just think it's very important to send the message out to people who have not invested yet for the future."

He outlines three ways in which the company can compete against its peers.

The first is by spreading awareness through its marketing campaign. BlackRock needs to take on a role in helping people to ask the right questions where retirement is concerned, he says.

In its campaign, the firm tries to give people ideas about what to do with their money, based on the type of jobs they hold, their income brackets and their risk profiles.

Online, microsites have been created to give people simple frameworks to plan for retirement around, such as estimating their retirement expenses and figuring out how much income their current savings will provide.

Suggestions are made as to how a person's portfolio should be weighted towards, say, 50 per cent growth and 20 per cent income. BlackRock funds are recommended for each category.

In Singapore, BlackRock is telling the intermediaries that it works with banks and financial advisers to direct potential customers to their microsites.

"Hopefully, because we're supplying all that information, research, and knowledge, they will invest with us, or they will use our model and invest somewhere else.

"Which is fine, as long as they are doing the investments, we at least have a chance of participating in that. And that's all that I can ask for," Mr Kapito says.

The second way which BlackRock can compete for retirement monies is through products specifically targeted at retirees, he adds. This can be through its LifePath series of "target-date" funds, which are essentially actively or passively managed funds aimed at investors retiring by a certain date, say 2030. The fund's asset mix becomes more conservative the closer the retirement date gets, holding more bonds and less equities.

Finally, BlackRock's competitive advantage, Mr Kapito argues, is how it has a wide range of products that people cannot find in one place anywhere else. "And we have performance on those products," he adds.

Performance is easier said than done, especially in the last few years where central banks, not fundamentals, contributed to returns. Many actively managed funds, which also have higher expenses, underperformed their benchmarks.

As a result, investors have been pulling out, placing their money with passively managed products such as index-tracking exchange-traded funds (ETFs) instead.

For the first nine months of the year, investors pulled a net US$17.7 billion from BlackRock's actively managed equity funds. But net subscriptions to the equities segment of BlackRock's iShares brand of ETFs were US$35.4 billion.

BlackRock's business is diversified enough to ride the ETF wave after a US$13.5 billion purchase of Barclays Global Investors in 2009 that catapulted the firm to become the largest asset manager in the world. Mr Kapito snagged the deal after talking to then-Barclays CEO Bob Diamond at a baseball game in New York City.

For BlackRock, the purchase added iShares, a passive fund management business where there are economies of scale. Expenses eat up investor returns, and low-cost investing is gaining more fans.

BlackRock could finally compete with rival Vanguard in a fast-growing asset class, even as numerous banks also started setting up their own ETFs. The firm is still losing market share to Vanguard's famously low-cost ETFs, though its iShares business has attracted significant institutional investor inflows since the purchase.

The Barclays deal came after another major one in 2006 when BlackRock bought Merrill Lynch Investment Managers, gaining expertise in the equity mutual fund business.

Mr Kapito credits both deals to an ability of the firm to prevent itself from being obsolete - despite admittedly not having a first-mover advantage.

"I think we have never been afraid to reinvent ourselves on behalf of clients," he says.

"And that has caused us to at times build different products or buy companies because we may have been late to have that particular product. "So the defining moment is recognising that you need to reinvent yourself, because your client is changing, the market is changing, everything you thought you had may not be enough."

"You know," he continues, "when you're an active manager and you buy a passive manager, it's a little shocking at first. But the reality is that our clients own both."

Is BlackRock's own retirement campaign, perhaps, also a bit belated? No, says Mr Kapito, with a characteristic quick turn of phrase in his calm, analytical manner. The topic is timely, he says.

"We're not late to the game because so many people are under-invested in retirement, and there's so much money sitting in cash waiting to be invested. . . some of the clients, some of the retirees are late to the game, and we're trying to make them aware that it's really not too late to get invested."

In a low-return world, BlackRock is also expanding into the alternatives space, providing investors opportunities in hedge funds, private equity and real estate. The firm is also seeing flows into multi-asset funds that aim for a specific outcome, high-yield bond funds and so-called unconstrained fixed income funds with more flexibility to provide returns.

Continuing to provide good performance and find good value for clients is the biggest challenge that is facing the firm, Mr Kapito says. Yet he says BlackRock is not pressured to take on more risks to achieve the returns clients seek, "unless the client wants to take more risks". "People are, right now, happy with the returns that they have. And this year will be another year where they'll be happy. I don't see people looking to increase risk".

Bullish on US, Asia-Pacific

Despite the run-up in asset valuations since the global financial crisis, Mr Kapito does not think there is a situation of excessive valuations. "I see investors looking at plenty of capital to invest, looking for returns and I think there are opportunities for returns," he says.

What is being talked about in his rounds with clients is how much cash there is in the global financial system, and how "that will eventually come out".

Another significant trend is how there is a growing demand for US dollar-denominated assets, due to growth in the US and the lack of it in Japan and Europe.

Interest rates might rise next year but not significantly, he says. And companies have benefited from low rates by refinancing and improving their balance sheets.

Together with trends of companies buying back their stock, raising dividends, and the relative lack of initial public offerings to soak up investor capital, there is a bullish case for equities, he says.

As president, Mr Kapito's job includes overseeing technology, analytics and the all-important portfolio management business, which he spends a lot of time on.

He says he tries to have an "inclusive partnership" style of managing people.

"I think it makes a better environment to work in, it encourages people to be entrepreneurs. . . it makes it very clear what's important. You need to give people the opportunity to be successful," he says.

At nearly US$360 a share, BlackRock's stock is trading around an all-time high, over 25 times its 1999 initial public offering price of US$14. The firm is valued at around US$60 billion.

Ultimately, being able to create successful careers for the 12,500 employees and their families at BlackRock keeps him going, Mr Kapito says. "I love the markets, I love being part of it, I love being part of the successful careers of my colleagues and helping them to have as successful a career as I have.

"I like the markets, but I had no idea that this would happen. And if you work hard, good things can happen.

"I went to school, started to develop a passion for what I might like, and it's all about the people you meet and the partners you have and some of the things that you can do."

haoxiang@sph.com.sg


This article was first published on Dec 6, 2014.
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