Larry Fink Q&A: BlackRock chief says rattled investors are playing it too safe
By Erin Schulte,
Larry Fink, chairman and chief executive of BlackRock, the largest asset manager in the world, is issuing a clarion call: Americans are too timid about investing for retirement, and we’re headed for the rocks.
Somewhere along the way — maybe it was the bank bailouts; the housing crisis; the long, slow recovery from the Internet bubble — Americans, typically a bold and enterprising lot, lost their appetite for risk. Those of us who are lucky enough to have jobs and are saving aren’t quite to the point of stuffing our mattresses — but we’re close. Fink notes that bank deposits hit $10 trillion at the end of 2011, up sharply from $6 trillion in 2004.
And now Fink, whose firm manages more than $3.5 trillion, says that not only are Americans not saving enough, but also they are investing what they do tuck away in assets that return too little. Ultimately, he argues that investing in cash or bonds that seem prudent and safe will exact a high cost: the inability to grow a sufficient retirement nest egg fast enough.
On Feb. 29, the firm launched its “Investing for a New World” initiative encouraging people to push aside what it portrays as unwarranted fear about equities at a time when valuations are compelling by historical averages.
The initiative encourages savers to rethink the cost of having too much invested in cash and to seek higher-yielding investments, such as dividend-paying stocks or corporate or municipal bonds. It suggests considering mutual funds or exchange-traded funds (ETFs) as a way to invest in alternative strategies or sectors. (And if you’re interested, it has some iShares to sell you.) Finally, because of ever-increasing life expectancies, it proposes ditching the old 60-40 stock-bond-mix rule of thumb and realizing that even if you’re 50 or older, some of your investments should still have decades-out time horizons.
I recently met with Fink in his New York office to talk about the initiative and why now is not the time to be gun-shy when it comes to investing for retirement. The interview has been condensed and edited for length and clarity.
BlackRock recently launched the “Investing for a New World” initiative. Why is this on your mind right now?
Some of it is just spending many years running money and asking yourself, “Why such behavior? Why are we seeing everyone so risk-averse?” It’s not like we just wanted to come up with a catchy ad campaign.
Much of it has to do with traveling around the world, talking to clients, who are all asking, “What do I do with my money?” Clients worldwide are struggling with low rates. They’re frightened. They’re having a hard time interpreting the good news and the bad news, the implications. Everyone is sitting on more money in cash and bonds than ever before. You’re seeing this bias worldwide.
Even high-net-worth investors?
It’s everybody — sovereign wealth funds, retail, institutional, from the Middle East to Asia to Europe to the United States.
We want to alert people, especially families managing defined-contribution plans [such as 401(k)s and individual retirement accounts] themselves. They have de-risked so dramatically that they are not going to achieve the pool of savings that will meet their needs during retirement. And many pension funds are saying right now, “I have a target of 7.5 or 8 percent return.” They’re not going to achieve that target, either — which has implications for our schoolteachers and firemen. And the deficits are going to be greater and greater in the states. So there are huge implications.
I’m the co-chair of NYU Langone Medical Center, and between my role at the hospital and President Obama’s health-care bill, it’s very clear to me how much we’re preoccupied with extending our lives. Many people manifest that desire by eating properly, exercising and seeking proper health care. We are all going to live longer. But what are we doing about having the ability to afford that extension of life? Sitting in 2 percent bonds, one will never achieve the proper nest egg, and it’s going to fall on the government, which no one is talking about yet.
I recently met with many congressmen and senators in Washington, and we talked about this, that nobody is focusing on the need for Americans to save. And it becomes even worse as more and more money goes from defined-benefit plans [pensions] — where there was an obligation for companies — to defined contribution, where the obligation falls on the individual.
Unfortunately in America, we only act when there’s a crisis, when our backs are against the wall. Without feeling it, though, our backs are against the wall right now, and we’re not talking about it.
I believe there’s a responsibility, and as the largest asset manager in the world, I think we have a bigger responsibility. If you’re 35 years old, you don’t care about what’s going to happen in 30 years, but you better care about it, right now.
For people who want put their money to work more effectively, what advice do you have?
Warren Buffett’s done a pretty good job, and you know what he’s doing? Focusing on long-term, high-quality companies with good management. There’s nothing special about what Buffett does, but he does it really well. He focuses on the long term, on great-quality companies, with a payday over 10 and 20 years.
Horizons are important. You have to start thinking about what you can earn in returns over 20 years and not worry about the monthly, quarterly and annual returns as much. One thing we have to help everyone understand is the importance of compounding. If you look at a chart of investments that have a return of 5 percent, and what your nest egg is over 30 years, or a return of 2 percent, we’re talking about a dramatically different amount. If you put all your money in cash and bonds earning 2 percent, you will not have enough money. And it doesn’t matter how much you’re allocating, unless you’re allocating 20 to 30 percent of your disposable income, which most people can’t afford; they won’t be able to live.
So there are ways to earn returns that are probably a little more frightening because you’re not accustomed to volatility. But equities are cheap by any historical measure. This is another reason I think a systematic review of equities and higher-yield bonds is probably in order. If you’re going to allocate less than 10 percent of your income to investing for retirement, you’re going to have to seek [higher-yielding] opportunities with a long horizon and stop looking at daily and weekly volatility.
Over a 20-to-30-year horizon, in almost every study, equities are a good asset class. They have been a bad asset class for the past 10 years. That’s why I like them now. Bonds were a great asset class for the past 20 years, and that’s why interest rates are at a lifetime low. To me it’s not the proper time to get into bonds. They’re safe! They’re secure! You’ll have your money — but why do you care if you have your money in a year if your needs are 30 years out?
Are there particular sectors or regions investors should focus on if they want to get more exposure to equities now?
There are very easy strategies to look at. We love dividend stocks. Because you’re getting that high coupon from that dividend, dividend-paying stocks have less volatility than the rest of the stock market, about 70 percent of the volatility of the typical equity market. You could own stocks like Verizon that pay you a 5 percent [dividend]. There are many stocks that do that, great companies.
We believe that clients who want to get into equities but are nervous about how to allocate should think about ETFs or some strategies that are more betalike, ones that mimic an index.
BlackRock also believes that buying diversification with a more global portfolio over a long cycle is good. If you did that last year, you were down a lot. This year, you were up a lot. If we were Robinson Crusoe or had the luxury of going away for a year and coming back, you’d say that emerging markets are unchanged. But in that one-year period, you had 20 percent volatility. But if you didn’t have a machine or any devices to see the market, if you believe you have a systematically strong strategy, you don’t worry. If anything, if you believe your investment strategy is sound, when the market was down 20 percent you should have bought more equities.
Which goes back to your emphasis on stock valuations.
Look at the historical prices of stocks. When you think about the Internet bubble — P/E [price-to-earnings] ratios were 80, 90, at unsustainable levels. If you’re able to buy equities as a universe at 12-ish times earnings, that represents some long-term good investments. Equities have been so battered down by all these investor fears, and they have done so poorly, it means that valuations are cheaper and cheaper and cheaper. And corporations are sitting on a trillion and a half dollars in cash.
Speaking of that, you’re calling for investors to put their money to work, but Apple has nearly $100 billion sitting around — couldn’t it be doing something more constructive with it than paying out a dividend?
But that gets back to the societal issue. It’s not just investors. It’s CEOs. It’s politicians. None of us feels comfortable focusing beyond the next quarter. Politicians aren’t focusing on long-term macro issues. We can’t just focus on the next election or how to mitigate this problem for this moment, we need long-term solutions.
Are there CEOs or companies showing the type of long-term thinking required to shift that horizon?
Yes, tons of them. You look at DuPont — what a fabulous company. It’s heavily oriented in global agriculture. Or McDonald’s. A few years ago, people thought it lost its footing. However, the company has done fabulously well growing that franchise.
Agriculture and farming is a great theme. As the middle class grows worldwide, people eat more meals. People are going from two to three meals a day, going from carbs to protein, which requires more grains to grow. And we’re losing arable land every year. Agriculture as a long-term macro theme to me is a no-brainer. How do you take advantage of it? You invest in great U.S. companies that are heavily involved in agriculture: Caterpillar, DuPont, Monsanto. Another thing that’s clear is that you can invest in the emerging world by investing in U.S. companies. Our companies are global.
You’ve been talking about people being proactive about investing, but is the burden entirely on the individual? You spoke at the Council on Foreign Relations about how Chile and Australia have created stable national retirement programs. Is there something similar we could do here?
The politics of it have been so horrific. In this country, they called it “privatizing Social Security” and unfortunately demonized it. And so it has a negative connotation.
What’s so important about Chile and Australia is not that it’s private or public. In Australia, employers are mandated to deduct 12 percent of everyone’s compensation. Even part-timers who work 20 hours a week during college; they’re starting to save for retirement. And then individuals choose where they invest it, like a defined contribution. Australia basically decided that it didn’t want insufficient retirement savings to be a public problem. And Australia is not going to have a savings problem or a retirement problem because of the way the country did this.
And because of the political climate here, that’s not something you could see happening?
I hope that our effort to educate people breeds a greater debate on this. We need to look at how we save for retirement, as a nation. I think it would be fair to say that no one, Democrats or Republicans, wants this to be on the backs of the public. If you look at all the state and local governments, the burden of these defined-benefit plans is really tough.
People can’t save for retirement if they don’t have jobs. You’ve said that the United States could get into a Japan-like situation if public and private sectors don’t work together to create jobs. How do you think Washington is doing in that regard?
It doesn’t matter if you’re a Democrat or Republican — our economy is very dependent on job creation from the private sector. Deficit reductions mean less employment. We are not going to have a growing public sector in the next 10 years as we start focusing on the reduction of federal deficits; it probably means fewer jobs in some form.
If we are going to have a growing, dynamic economy that’s creating jobs, it’s going to come from the private sector. It doesn’t matter what your philosophy or political background is. We are going to have to work together to create opportunities for jobs. For our entire lifetimes, there have been more and more jobs created in the public sector, in state, local and federal governments. And now that’s reversing. It’s another wake-up call. What does it mean to reduce our deficit by $6 trillion or $7 trillion? We’ll be giving up different services. It may mean higher taxes. Reduction in spending is also going to mean fewer jobs.
So do you think there’s any meaningful work being done between the private and public sectors to create jobs?
Well, business roundtables, but there’s not enough.
With Greg Smith’s resignation from Goldman Sachs, Occupy Wall Street and the financial crisis, there’s a pervasive feeling of discontent with Wall Street and corporate America. You’ve spoken about the leadership we need to move forward. How have you built the culture of BlackRock?
We never compete with our clients, and we have never deviated from that business model, from Day One. That has a resounding impact on our employees. That’s a steadfast foundation. The other thing that has differentiated us is that risk management is important.
The third thing is that in every town-hall meeting, I tell employees, “Do not think about how much money we manage — that is an insignificant number.” I mean, it’s a big number, but it’s not important.
What’s important is that we manage money for real people. We manage more money for schoolteachers and firemen than any firm in the world. If you screw up, you hurt that schoolteacher, you hurt that fireman. That’s the responsibility we have. To me, the culture of BlackRock is that we’re a client-centered organization heavily involved in risk analytics all for the benefit of our clients. Our job is to be problem-solvers. As we’ve grown in footprint and grown geographically, we’ve become better problem-solvers.
It’s a long game. You can’t focus on the days and quarters.
Erin Schulte is a writer and editor in New York.