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Where Does Top Asset Manager BlackRock See Opportunities?

June 15, 2017
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BlackRock started out in 1988 as BlackStone Group, a fixed-income shop with eight people.

It adopted the name BlackRock in 1992, and in 1995, became a unit of PNC Financial. BlackRock went public in 1999 and had $165 billion in assets under management by year’s end.

Key acquisitions following its debut included Merrill Lynch Investment Managers in 2006 and Barclays Global Investors in 2009. The latter purchase gave it access to the iShares exchange traded fund platform.

Today, BlackRock is the world’s biggest asset manager with some 13,000 employees. At the end of Q1, it boasted $5.4 trillion in AUM. It’s also the biggest exchange traded fund provider, thanks to a series of strategic mergers and moves.

BlackRock continues to stay on top of ETF trends, from its iShares Core series to smart beta to the ubertrendy environmental, social and governance ( ESG ) funds. We checked in with Jennifer Grancio, global head of iShares distribution, to get the company’s take on current trends in the ETF universe as well as its market outlook.

“BlackRock’s macro view is fairly bullish,” she told IBD. “We expect growth to continue to rise, not just in the U.S. but globally.”

The full interview with Grancio follows:

IBD: Which are BlackRock’s most popular equity ETF strategies – and why do you think that’s the case?

Jennifer Grancio: Cost and quality are top of mind for investors, which is why so many of them are turning to ETFs to build diversified portfolios at the core of their portfolios. These are the broad market exposures – domestic, international, emerging markets, growth, value, small-cap and so on – that can be accessed with an ETF at a fraction of the cost of their traditional counterparts.

For example, the iShares Core S&P 500 ETF ( IVV ), the world’s second-largest ETF, offers exposure to large U.S. stocks for just 4 basis points (in fees). The growth of our iShares Core ETF suite reflects this overall trend. We saw $50 billion in U.S. flows year to date, with more than $300 billion in assets in the U.S.

I would note that our Core ETFs are as popular with institutional investors as they are with individuals and financial advisors. A recent survey by Greenwich Associates found that 60% of institutional investors use ETFs for their core portfolio allocations.

IBD: How does BlackRock differentiate its ETFs from its competitors?

Grancio:  In addition to iShares being the largest global ETF provider, we offer the most diverse lineup of products to meet the demands of our clients, among them broad exposures, single countries, smart beta, fixed income, sectors and currency-hedged. At a portfolio level, we aim to manage our funds tax efficiently and deliver as close to a benchmark return as possible.

Our scale provides distinct benefits that we can pass on to investors. We can access information and realize efficiencies that small shops simply can’t provide, whether it’s our global trading platform, our deep portfolio management bench or the powerful integrated technology of BlackRock’s Aladdin. We also use these resources to make sure we’re constantly innovating. For example, iShares launched the first bond ETF 15 years ago; today, we offer 80 fixed income ETFs in the U.S., and we’re leading the way in smart-beta bond ETFs.

IBD: What’s your opinion on the active vs. passive debate?

Grancio:  The active/passive debate is completely outmoded. Every investment decision is active, whether you’re considering an index fund, or, like the vast majority of financial advisors, want to blend active and index investments. What matters for investors today is not, ‘Which product should I choose?’ It’s ‘How can I build the best portfolio – at the right price and with appropriate risk – toward the goals that matter most to me?’ And pursuing those goals is an active, ongoing endeavor.

We found that most investors don’t make the active/passive distinction, either. According to BlackRock’s ETF Pulse Survey, 9 out of 10 investors said that owning ETFs and mutual funds together in a portfolio is a good thing. That said, more and more people are putting their new money to work in ETFs, which is why we’re seeing this broad shift in assets from mutual funds to ETFs.

IBD: What’s your outlook for the U.S. and global stock markets?

Grancio: One of our major themes has been reflation, and in fact, we’re seeing inflation tick up for most economies, which should have a positive impact on earnings.

From an investment perspective, our preference is to go global – to Europe, Japan, and in particular emerging markets, where we think valuations are better than in the U.S. In particular, we believe that small caps, cyclicals and banks could benefit from the reflationary trend. The nice thing about ETFs is that they let you go as broad or niche as you want.

IBD: What types of ETFs should investors focus on in a rising rate environment?

Grancio:  While rates have gradually come up in the U.S., we don’t see a big jump in yields anytime soon. So the challenge for investors is to try to minimize the adverse effects of rising rates while still seeking yield that doesn’t expose them to too much credit risk.

We think a diversified approach is the best way to manage these multiple challenges. For example, ETF investors could look to higher-quality corporate bonds or dividend stocks to enhance their yield potential and also reduce some of the interest rate risk in their portfolios. And shortening the duration of your overall bond sleeve can make you less vulnerable to rising rates while also helping to diversify equity or credit risks.

There are also ETFs that are designed to explicitly counter rate rises, such as floating rate bond ETFs that adjust interest payments to reflect interest rate changes. That’s a lot to consider and how you invest depends on your personal situation, so we think it’s a good idea to ask a professional for help.

One option I don’t recommend is staying in cash until it all “blows over.” Trying to time the market is short-term thinking, and a good way to miss gains when the market rebounds.

IBD:  As fees keep getting lower, how will the providers make money?

Grancio:  Although the Department of Labor’s fiduciary rule only recently went into effect, the attention to cost has been intensifying for some time, alongside the movement to fee-based advice. We think this focus is a very good thing for investors, particularly for their long-term holdings, where low costs keeps more money working for them over time. Our iShares Core ETFs have among the lowest expenses in the industry, which has helped attract meaningful flows to our funds, as I mentioned earlier.

It’s true that from a provider perspective, lower fees will have an impact on your bottom line. That said, BlackRock’s product line spans a broad range of offerings across price points, and reflects what our clients are asking for. For example, there’s appetite for investing in frontier markets, which is necessarily more expensive than investing in the S&P 500. Or a large institution looking to move into or out of a position may be seeking liquidity above all else, with less consideration for cost.  No matter who you are, though, smart investing should ultimately be about value – am I getting what I paid for?

IBD: How are BlackRock’s ESG funds doing in terms of assets?

Grancio:  Sustainability is important to many investors, from big sovereign wealth funds to millennials. More and more of them want to be able to align their views on environmental, social and governance issues with how they invest for the future. Today, responsible investing is no longer just about staying away from guns, cigarettes and alcohol, but about specifically pinpointing companies that have a positive impact on things like clean water and carbon emissions.

BlackRock has a large sustainable investing footprint. In the U.S. there are eight iShares ETFs that focus on one or more aspects of ESG. Two of them – iShares MSCI KLD 400 Social ETF ( DSI ) and iShares MSCI USA ESG Select ETF ( KLD ) – have track records of more than a decade. And globally, we manage about $4 billion in sustainable ETFs.

IBD: Are there any ETFs that don’t exist yet but you think should?

Grancio:  Technology and access to data allow us to index investment styles, markets and strategies that were once the sole province of traditional managers. And ETFs have made it possible for all types of investors to track the performance of these indexes at very low cost. Smart beta ETFs, which isolate factors like value, momentum and low volatility, are a good example.

This type of innovation is only going to accelerate as technology evolves. Big data is leading to the creation of more refined, targeted indexes – for example, purer exposures to factors or access to narrow subsectors like robotics.  The result will be an expanded set of choices for investors to build and manage portfolios that really work for them.

Note: About the surveys

The BlackRock U.S. ETF Pulse Survey was conducted from September 12-26, 2016, by TNS, an independent research company. The survey interviewed over 1,000 individual investors and 400 financial advisors, from nationally representative online samples of household financial savings/investment decision makers age 21-75, with $100K+ in investable assets and aware of ETFs; and financial advisors age 21-75 with $25MM+ in assets under management.

The Greenwich Associates U.S. Exchange Trade Funds Study is based on interviews between October 2016 and January 2017 of 187 institutional investors. That research sample encompassed institution funds, asset managers, insurance companies, investment consultants and RIAs. Participants manage a total $6.668 trillion in assets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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