One of the largest but most unknown firms in the investment world is BlackRock, admits its founder and chief executive Larry Fink. “This is not something we planned for, but we just do not believe in ‘self-marketing’. Our whole mandate is to achieve acceptance through performance and client service.”
The firm which is now 13 years old, had the majority of its ‘founding fathers’ coming with Fink from First Boston, with another group joining from Lehmans. They had a very basic idea. “We felt if we could start an operation with ‘risk analytics’, we could have an advantage versus many of the buy-side firms.” The fundamental philosophy was very simple – understanding risk, he says.
Originally, the firm became part of the Blackstone Group, but over some years due to disagreements, BlackRock separated and became part of a large regional bank, PNC Financial Services. “Now we are publicly quoted with management owning about 16%, 14% in public hands and PNC holding 70%.”
The growth trajectory has been phenomenal, making the firm one of the fastest growing managers in the world - if not the fastest, he believes. Assets under management have grown at annual rate of 24% over the past five years, reaching $226bn (e250bn) at September 30, 2001. Revenues have also been charging upwards at over 35% per annum compound.
The key has been BlackRock’s risk technology, which has enabled the firm to manage risk on a consistent day to day basis. “Our most important asset is investment performance. It is why we have been able to win so much business.” The strengths are in fixed income and money markets but when it comes to equities, Fink admits “we have some strong and some weak products”. His job in the next few years is to correct this. But client service probably rates as important in his reckoning as performance. “You have to understand your clients’ needs.”
The products are not across the board, but focused and with only one or two new lines being added to the range in any year. “But you need the right people to develop products and if we don’t find the right people we don’t go ahead. We only developed our European equity product so quickly because the team joined us from Scottish Widows.”
A feature he points to is the diversified client base, on the institutional side pension funds accounting for 28% and insurance companies for 13% of assets. “On the separate account side, we have seen the number of institutional clients grow from 181 in 1987 to over 300 currently,” says Fink. “We believe we are now among the top 10 pension fund managers worldwide in terms of assets.”
On the international side, the company added in 1999 nine new international clients and last year the number had jumped to 33, of which 17 were European.
While the aim is to diversify by growing the product range and the risk analytics services, the fixed income growth continues to be explosive says Fink, and this class now accounts for 59%, with another 32% in liquidity management.
He attributes the fixed income success to the firm’s very active management approach, developing its analytic process, which assesses risk on a daily basis using duration, convexity, yield curve and liquidity. “Our style works, it is bottom-up, heavily quantitative and highly research-driven.”
The equity area is much more spotted, he acknowledges. Certainly, roping in the team from Scottish Widows has been a tremendous success and some $8bn in European equities business has been won in consequence.
The process the team brought in has remained intact,. but that was because it closely matched that already in place, says Fink: “It’s a bottom-up approach, with heavily concentrated positions in 30 or 40 stocks and a strong awareness of risk in portfolios.” In fact the two processes were so close that a “wonderful marriage” has been the result, maintains Fink.
The Edinburgh office is responsible for the European equity product, which can be delivered in the Europe ex UK format favoured by UK pension funds,the pan- European flavour favoured by US-based investors, and increasingly by those in the UK, or in the Euroland version for continental based players. But much of the research comes from across the whole company, with increasing use being made of the US-based ‘credits’ team.
On the US side, Fink says that equity strengths include its US small and micro-caps. “And we are continuing to take steps to build out our equity platform. We brought in a ‘five-star’ manager in large cap value style in mid-2000, and a new small/mid cap value leader will be joining the firm on January 1, 2002.” But he adds: “We have weaknesses, such as large cap growth – so we need to build that, and we have to grow in global equities. For a $200bn manager, there are some wide open gaps. So I call us ‘a very large manager, with some great successes, but equally with some areas where we need to build to become that $400bn manager.”
He is adamant that it means finding the right people. “We don’t hire people just because they are good, we hire them because they will be partners. So in our discussions with potential candidates, we talk about philosophies – how can we enhance each other and become good partners. It’s a question of one and one making three, by using the abilities of both sides.”
The approach is not to buy a manager, for example, just because it makes financial sense. “Yes, the long term return has to be financially rewarding, but the partnership issues are much more important. We want everyone to operate from one platform – multiple platforms are out – we are not interested in buying a firm and keeping them independent. That may not be a bad model, it just isn’t ours.”
BlackRock’s liquidity strengths include one of the largest US-based money funds, which currently is being brought to Europe.
And on the hedge fund side, Fink reckons that have in their arsenal one of the best in world - “Obsidian, our fixed income hedge fund, - we don’t talk about it, we don’t advertise it, and currently it happens to be closed at $2bn. But it has been very successful over a five-year period.” Also, tucked in on the alternative side are the real estate investment trusts and the collateralised bond obligations business.
A product that emerged in its own right into the daylight mid last year was BlackRock Solutions. “This is a product based on the proprietary risk technology process that we started to develop some 13 years ago. This has become so big that we can now offer this to clients. For example, the entire balance sheet for Freddie Mac is run on our systems and we do work for GE and other large corporates, providing risk technology – analysing the risk they have in their portfolios. Currently, we are analysing $1.4 trillion in positions for a range of institutional clients.” Revenue generated by BlackRock Solutions contributes to the technology spend to keep the firm ahead.
The fact that the BlackRock name is not that well known in Europe does create an opportunity in itself, he maintains. “Part of our challenge is to get the name known in Europe.” He sees no difficulties in handling double the firm’s current European equity assets, but knows that the European equity markets are finite and will only grow at their own pace, with the assets mainly coming from the Netherlands, Switzerland and Scandinavia, as well as the UK.
He still expects the business to be 70 to 80% fixed income and liquidity three or five years out. “The only way we would grow equities in very large way would be through a big acquisition, and here we would be very cautious to make sure we can protect our team culture.”