The world according to Larry Fink

Whenever Laurence Fink speaks his mind, which is often, people of all stripes tend to listen. As the globe-trotting head of New York–based BlackRock Inc., he is responsible for US$3.7 trillion, more than any other asset manager on the planet. And that gives him a unique insider’s take on financial markets.

Fink, who earned US$23.6 million last year, grew up middle-class in Los Angeles. After studying politics and business at UCLA, he joined investment bank First Boston and quickly became a rising star in the world of mortgage trading. But a disastrous bet on interest rates in 1986 crashed his career. After dusting off the fallout from that fiasco, which reportedly cost his former employer about US$100 million, Fink founded BlackRock’s predecessor firm as a money manager focused on risk management. Today, his clients include pension funds, foreign governments, sovereign wealth funds and the U.S. Federal Reserve.

On Main Street, the BlackRock CEO’s words carry weight too, because the son of a shoe-store-owner dad and college professor mom speaks like a regular guy. “With Larry, you get two important things: candor, and he doesn’t just talk his own book,” Jim Wilkinson, a former U.S. Treasury secretary chief of staff, recently told Barron’s.

Fink was in Toronto recently to update clients on the state of the world economy. He sat down with Canadian Business to discuss topics ranging from the Occupy movement to the outlook for equity and bond markets. The bad news is that he sees challenging times ahead, especially for conservative investors who can’t stomach risk. The good news is that the world’s most influential asset manager says long-term investors have nothing to fear but fear itself.

HOW TO INVEST

According to BlackRock’s CEO, the opportunities to invest globally have never been better. Thanks to exchange-traded funds, you don’t have to be a stock picker to tactically allocate portfolios across sectors and regions. But Fink thinks investing directly in companies is still a solid strategy. “As more and more money goes into beta”—that is, seeking average market returns—he says, “investing becomes easier for alpha traders because of less competition.” Furthermore, if more and more money goes into index funds, then initial public offerings “are going to become pretty darn cheap. And so that may be a good thing for the alpha guys.” When asked where to invest, Fink turned the question over to BlackRock’s equity team, which believes commodities will play an important part in client portfolios in the future. In particular, “agricultural commodities are supported by the dynamics of water shortages in Asia and the Western United States, the declining payback from the green revolution in terms of improving crop yields and the increasing demand from Asia for a diet based more on grains and meat as the population becomes wealthier,” the group responded by e-mail. Emerging markets still stand out as areas of superior economic growth and deepening financial systems. Asia and Latin America are not risk-free, but “there seems to be sense in buying equities in these regions on similar or lower valuations than their counterparts in the developed world given that dividend growth is likely to be superior, given higher economic growth potential.”

WHAT TO EXPECT FROM MARKETS

Low interest rates, Fink says, are “a tax that’s killing insurance companies, old ladies, everybody.” But they are going to be around for the near term at least, so investors need to be realistic about the need to take some risk. “We have lost our bearings,” he says, adding that good companies are still a solid investment over a long cycle. As coverage of European and American financial woes have the masses running from equities, he says, “long-term investors who are billionaires tell me they are having an easier time today than ever before in their lifetimes because nobody is a long-term investor anymore.” According to BlackRock’s equity team, an annual return in the “mid to high single digits” is not an unreasonable target in the current environment. High-yield corporate bonds are attractive, although not without volatility. But Fink thinks avoiding stocks of companies with strong balance sheets and growing dividends is a mistake. “I can say with confidence,” he says, “if you invest in just bonds for the rest of your life, you are not going to have a retirement.” Earning an annual return of 2% won’t cut it, unless you “work until 90.” Even investors with generous benefits and pension plans must take on some risk to build a decent nest egg, “so do you really care if markets go up or down 15% over a six-month period?” The reality, Fink says, is that some very fine companies are trading with dividend yields above 5%. “And with interest rates so low, these equities are a very powerful alternative for income, long-term inflation protection and price appreciation.”

INVESTOR HYSTERIA

According to Fink, the European situation looks more problematic than it is because of the number of nations required to agree on a plan. In America, fiscal problems are not as great, but the lack of effective action is just as problematic. As a result, investors around the world currently “do not trust governments to do the right thing.” Add in constant coverage of economic woes by financial journalists (who Fink says make a living by “promoting chaos and promoting short-termism”), and you can understand why there is mass hysteria among investors despite the fact that the global financial system is more stable than it was back in 2008 and ’09. Nevertheless, he argues, it is a good time to buy equities. While the political situation in America is “pretty depressing,” Fink has faith in U.S. stocks because he thinks the world’s largest economy will avoid a recession. Despite all the “crappy noise” about its future, the United States is still the country that created Google, Facebook and Apple. And Fink points out there are going to be similar U.S. success stories in the future no matter what happens on the macroeconomic level. As for Europe, BlackRock’s boss says the sovereign debt problem can be addressed if political leaders, especially in Germany and France, get their act together. “It might take US$2 trillion,” he says, but only half of that needs to come from the public sector because the private sector has been de-risking, not deleveraging as it had to do during the previous crisis. If you combine the private-sector cash that is currently sitting on the sidelines with the leverage that can be applied to public money being tossed at the EU problem, Fink says there is enough to get the job done. To get the private sector to come to Europe’s rescue in a big way, politicians simply need a “grand plan” that allows for growth and has enough financial backing to inspire confidence “with awe.” And there is a good chance of that happening because everybody is motivated by fear of what could happen if it doesn’t.

FAITH IN THE GREENBACK

“In the last 20 years,” Fink says, “dollarization of the world was the trend. Now, that trend is being broken. I saw one of the big sovereign wealth funds in my office recently. I was told their largest exposure to any one currency is 25%. That’s shocking to me. So the trend is more diversification.” Right now, the dollar benefits from the fact there is really no reserve currency alternative. It will remain the world’s safe haven unless Washington somehow seriously damages faith in its ability or willingness to pay creditors, which didn’t suffer from the recent debt downgrade or debt-ceiling debate fiasco. If the United States fails to maintain confidence, then you could see other “sovereign wealth funds with 50%, or 60% or 70% allocation to dollars diversify to no more than 25%.” If faith in the greenback is somehow lost completely before full convertibility of China’s yuan is obtained, Fink warns investors to expect another “massive economic crisis.”

THE OCCUPY MOVEMENT

“These are not lazy people just looking for something to do,” Fink says. “These are men and women who don’t like the direction things are going, and they are taking to the streets because nothing else has worked.” Whether it is in Athens or on Wall Street, Fink says public protests are a simple statement of fear by people who are frightened for good reasons. There are jobs to be had in some parts of America, he notes, but many people can’t move because they can’t sell their houses. “We’ve lost mobility, which breeds hope,” he says. Think about what Japan is doing, he adds. “There is no consumption in that country. And the Japanese government is raising consumption taxes by 5%. How can they do that?”

CONFIDENCE

According to Fink, the world’s financial trouble has spawned short-term thinking. “It feels like the ’70s,” he says. It is time for investors “to get back to basics.” Fink recently met with the head of one of the largest U.S. public pension funds. After trying to figure out how to limit his equities risk and still make money, the pension fund manager “was just crushed.” He desperately wanted to know what he should do. Fink told him to stop worrying about what will happen tomorrow when his fund’s liabilities are spread over 20 years. If rules allowed, Fink added, the guy’s pension fund should sell all of its bonds “and go 100% equities” because that’s where tomorrow’s returns will be made.