A dovish Fed and robust global economy will lure big investors back to equities
Robin Wigglesworth and Richard Henderson in New York and Owen Walker in London
BlackRock’s shares have lagged behind those of its rivals this year © Bloomberg
Global equity markets are poised for a “melt-up” as signs of healthier economic growth in the US and China reassure big investors that have largely stayed on the sidelines of the 2019 market recovery, according to BlackRock’s Larry Fink.
The chief executive of the world’s largest asset manager said he is optimistic that a “Goldilocks” scenario of improving economic data and more dovish central banks will compel institutional investors that have kept ditching stocks this year to reverse course.
Investment strategists have dubbed the 2019 stock market rally the “flowless recovery”, with equity funds continuing to suffer outflows even as the FTSE All-World index has climbed over 14 per cent — its best start to a year since 1998.
“There’s too much global pessimism,” Mr Fink said in an interview. “People are still very underinvested. There’s still a lot of money on the sidelines, and I think you’ll see investors put money back into equities.”
Bond funds have attracted $112bn of inflows already this year, but equity funds have suffered almost $90bn of investor withdrawals, according to EPFR, a data provider.
BlackRock cemented its position as the world’s biggest fund manager, growing its assets under management to $6.5tn in the first quarter, thanks to strong market returns and inflows of $65bn.
The impact of last year’s market tumult was apparent in the quarter, however. Year-on-year, base fees decreased 5 per cent, because it started the year with less than $6bn in assets. There was a 7 per cent decline in revenues to $3.3bn, which resulted in a 1 per cent fall in diluted earnings per share to $6.61.
However, this comfortably beat analyst expectations of $6.13, and the group saw technology revenue for the 12 months to March 31 increase 11 per cent, driven by its widely used Aladdin investment platform.
Listed investment groups saw their shares tumble almost 26 per cent on average last year — their worst performance since the financial crisis — as investors feared buoyant markets would no longer mask mounting fee pressures across the industry.
BlackRock has this year trimmed jobs and reshuffled its senior management ranks. Mr Fink took a 14 per cent pay cut.
“With fees coming down a lot of the big players are looking for new ways to generate revenues,” said Kyle Sanders, an analyst with Edward Jones. “For BlackRock it’s through software and Aladdin, which isn’t tired to moves in the market.”
The asset manager’s stock rose over 2 per cent on Tuesday to trade at its highest level since early October.
BlackRock is in a years-long battle with Vanguard to dominate the global fund management industry, with the latter catching up fast. However, BlackRock has claimed the top spot for exchange-traded fund global flows this year, which it said was driven by its fixed income products.
The iShares ETF business it acquired from Barclays almost a decade ago now manages almost $2tn, which alone would make it one of the world’s five biggest investment groups.
The average expense ratio of US equity funds have almost halved since 2000 to 0.55 per cent last year, and industry executives expect the trend to worsen. Morgan Stanley and Oliver Wyman’s latest annual study of the asset management industry predicted that revenues from traditional, actively-managed funds in developed markets will shrink 36 per cent by 2023.
BlackRock remains comfortably profitable, but to counteract these pressures it is doubling down on China. Mr Fink has told the FT that the company was in discussions with Chinese regulators over taking control of a local fund manager and ramping up its “alternatives” business.
The Morgan Stanley-Oliver Wyman report estimates that alternative asset classes such as private equity, direct lending and real estate will keep growing at a healthy clip and account for 40 per cent of all investment industry revenues by 2023.
The ravenous appetite for alternative investments has stirred concerns among some analysts and investors, and Mr Fink said that the sheer scale of the inflows should be watched.
“It’s something everyone should be focused on, as there are extraordinary flows going into an illiquid asset class,” he said. “But if you have a client base with longer-dated liabilities you can have a higher percentage of illiquid investments.”
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