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Money management

BlackRock’s Fink cites onshore China presence, portfolio construction among long-term growth initiatives

Larry Fink, chief executive officer of BlackRock Inc., focused on long-term profitability in annual shareholder letter.

In his annual letter to BlackRock (BLK) shareholders, Laurence D. Fink, chairman and chief executive officer, focused on the long-term profitability of the $5.98 trillion company, outlining major initiatives including global expansion in growing markets, development of enhanced portfolio construction capabilities and incorporating environmental, social and governance risk factors in all investment processes.

"We have the opportunity to leverage our scale, globally diverse investment platform, and capabilities in technology and portfolio construction to differentiate ourselves and generate sustainable, long-term financial performance that benefits our clients, shareholders, employees and the communities where we operate," Mr. Fink wrote in the letter , released Monday.

BlackRock already maintains 69 offices in 30 countries and its employees collectively speak more than 100 languages, but the firm is "becoming increasingly local and investing in high-growth markets around the world," Mr. Fink wrote.

The firm is strongly focused on building its onshore presence in China, "which is one of the largest future growth opportunities for BlackRock," Mr. Fink said, adding that Asia is expected to drive 50% of the organic AUM in the global asset management industry over the next five years, driven largely by demand for long-term and diversified investment strategies.

"Our goal is to become one of (China's) leading global asset managers," Mr. Fink said.

BlackRock has been in talks to buy a majority stake in the mutual fund business of China International Capital Corp. since November, according to Bloomberg, and holds a 16.5% stake in Bank of China Investment Management, a subsidiary of Bank of China.

Melissa Garville, a BlackRock spokeswoman, declined to comment on the status of BlackRock's talks with CICC.

BlackRock recently announced that it decentralized its institutional client business and moved to regional coverage and added new country heads in the U.K., Australia and the Asia-Pacific region (Pensions & Investments, April 2).

The firm recently separated Latin America from North America and is "building out our investment capabilities and distribution footprint to support the region's long-term growth potential," Mr. Fink said.

BlackRock also is concentrating on "capturing the shift from product selection to portfolio construction," Mr. Fink noted.

"Traditional investing frameworks are insufficient to meet the needs of most investors, whether individuals saving for retirement or pension funds seeking to close their asset-liability gaps," Mr. Fink wrote, stressing that BlackRock has always focused "first and foremost on what our clients need and to construct portfolios – both at scale and with high levels of customization – that align with their long-term goals."

In March last year, BlackRock consolidated its multiasset portfolio construction teams into a single client portfolio solutions unit (P&I, March 8, 2018), which Mr. Fink and Robert Kapito, BlackRock's president, termed a "new investment pillar for the firm alongside the firm's global fixed income, active equity, multiasset, alternatives, ETF and index, and trading and liquidity strategies," in an internal memo seen by P&I.

Mr. Fink in his letter told shareholders that the firm is "building the most comprehensive investment platform so that we can truly take a product-agnostic approach to portfolio construction."

He said BlackRock is creating portfolio building blocks by strengthening its capabilities in ETFs; factor-based investments; illiquid alternatives, including infrastructure; traditional actively managed strategies; sustainable investing; and innovative defined contribution plan solutions

"By focusing our strategy and resources on the areas of highest client requirement and demand, we will capture share in the fastest-growing areas of our industry, enabling BlackRock to grow faster than the industry average organic asset growth rate of 3%," Mr. Fink wrote.

BlackRock's fiduciary duty in investing on behalf of its clients extends to advocacy by its investment stewardship team for strong governance of the companies it invests in, including increased engagement on "environmental and social issues we believe are consistent with long-term financial returns," Mr. Fink's letter stated.

In addition to promoting ESG standards as part of corporate governance, BlackRock is implementing ESG principles in investing through traditional strategies such as actively managed equity and fixed income, alternative investments and cash management.

"We believe business-relevant sustainability data is useful to portfolio managers and the incorporation of this data into investment processes results in better long-term returns for clients," the letter said.

Mr. Fink said BlackRock's framework for creating shareholder value worked well in 2018, noting that the firm returned $3.6 billion to shareholders, a 30% increase from 2017; paid cash dividends of $1.9 billion; and repurchased $1.7 billion of shares.

Despite significant investment to buoy high-growth areas the company, BlackRock expanded its operating margin in 2018 by 20 basis points to 44.3%. Technology-services revenue, including from the firm's Aladdin risk-management system, was a record $785 million.

Aggregate net inflows were $124 billion, despite about $90 billion of net outflows from institutional indexed equity strategies as investors de-risked or harvested gains, the letter said.

Finally, Mr. Fink highlighted BlackRock's record $16 billion of commitments to its family of illiquid alternative investment strategies in 2018. The firm now manages more than $80 billion in invested and committed capital, he said.