BlackRock's inflows strong despite market volatility, political pressure

Updated with correction.
BlackRock’s 2022 ETF net flows were incorrect in an earlier version of this story.

BlackRock Inc.'s massive size is proving to be an asset amid one of the most volatile markets since the pandemic, one of the New York-based firm's top executives said in an exclusive interview with Pensions & Investments.

BlackRock's total assets under management fell to $8.59 trillion at year-end, from a peak of $10 trillion in 2021. And yet BlackRock still had a huge year of inflows in 2022, even as it battled political flak from Republican-led states about its ESG fund offerings and as both stock and bond markets sank.

BlackRock this year is aiming to grow in areas including its iShares ETFs and private markets; its client risk management software Aladdin; and by continuing to win billion-dollar pension fund mandates to maintain its status as the world's largest money manager.

While assets under management fell from a peak of $10 trillion, BlackRock posted roughly $307 billion of total net flows in 2022, when most of the asset management industry saw outflows. That put BlackRock ahead of competitors tracked by Pensions & Investments, and comfortably leading No. 2-ranked Blackstone, with roughly $174 billion in total net flows.

In an interview, Mark McCombe, one of three vice chairmen at BlackRock, said the juggernaut's size and broad offerings are proving attractive in volatile times. Based in San Francisco, Mr. McCombe, who recently was promoted from chief client officer, said he regularly converses with investors regarding worries about the collapse of Silicon Valley Bank, Credit Suisse's impending sale to UBS Group and the health of the nation's banking system.

Yet again, BlackRock's massive size works in its favor in times of market stress, he said. Mr. McCombe has also been highlighted as one of a handful of executives who might succeed Chairman and CEO Larry Fink.

"More and more of our clients want to do business with fewer but broader institutions, that's what has driven our business for years and the pandemic accelerated that. The investing world is more complex and diverse for pension funds, corporate plans and endowments," he said.

As for its long-term outlook: "The firm's strategy remains very focused on delivering value for our clients."

BlackRock pitches the "whole portfolio" concept, Mr. McCombe said, the idea being that "when an adviser comes to us, we build a model," especially advisers who charge a fee for advice, a fast-growing segment. BlackRock's outsourced CIO mandates are "a whole portfolio for an institution. We will asset allocate to give the exposures you need," he said.

“Look at some of the wins we have, the AIG deal was an exact example of a CIO saying ‘I have a long-term strategic vision for my business but I don’t have the necessary resources around that.’ BlackRock became that partner,” Mr. McCombe said, referring to American International Group hiring the firm in 2022 to conduct or provide select investment services for up to $60 billion of its global investment portfolio and up to $90 billion in its life and retirement investment portfolio.

BlackRock's win in February of the U.K.'s £8.8 billion ($10.6 billion) Royal Mail pension fund mandate and being selected as named fiduciary of the Teamsters Central States, Southeast & Southwest Areas Pension Fund, were also confirmation that size does matter. The Teamsters plan is receiving a $35.8 billion injection from Pension Benefit Guaranty Corp. to avoid insolvency.

"Our size again became an asset for clients. It's a lot easier to work with a partner that they know has the capabilities to deliver across a range of tasks."

Another area of hoped-for growth is in alternative assets.

In private markets, "We're a big provider of alternatives, although we're not necessarily known for that. It's not the same as KKR or Apollo but it increasingly dovetails with BlackRock's pitch to investors. Which is 'what kind of risk do I want, what liquidity do I have?' Private markets plays a critical role" in creating a whole portfolio, Mr. McCombe said.

Alternatives represent $318 billion in AUM as of Dec. 31, across infrastructure, private equity, credit, real estate, hedge funds and alternative solutions.

It's no surprise that BlackRock executives this year are careful around ESG language. Unlike in prior years, Mr. Fink's annual letter issued in March didn't use the acronym ESG once in its 20 pages.

As part of BlackRock's strategy, "sustainability is at the core of what we do. That's obviously become super politicized," Mr. McCombe said.

Still, Mr. Fink's latest annual letter conspicuously avoided the acronym ESG, and climate activists seized on that as a sign BlackRock isn't committed. Meanwhile, Florida Gov. Ron DeSantis has banded together with other state officials to lobby against ESG investments in the pension funds.

"Larry's much-anticipated — and record-length — annual letter is as notable for what it did not say as what it did," said Terrence Keeley, a long-time BlackRock executive who retired and wrote a book about fixing the flaws of ESG investing.

Gone are references to net zero asset managers alliance, the Paris Accord, the Sustainability Accounting Standards Board and Task Force on Climate-Related Financial Disclosures, he noted.

"In their place are these two zingers: 'It is not the role of … BlackRock to engineer a particular outcome in the economy,' and 'It's not our place to be telling companies what to do.'"

Mr. Keeley called these "significant departures from years past. Whether they will appease BlackRock's critics without enraging loyal supporters remains to be seen."

Mr. McCombe countered by saying: "I speak for Larry and the management team, people are asking are you walking it back, the reality is as the world's largest investor we have always invested in every single sector on the planet. That's what we're pushing forward. Our job is to identify risks and stay ahead. We see a massive movement of capital toward this transition economy. Did it mean we turned our back on traditional fossil fuels? No."

Mr. McCombe reiterated that alternative energy is the future.

"This is one of the most massive shifts of capital under way. The economy is transitioning to clean energy. Texas is leading the way. They are at the forefront. They're doing it their own way. That remains one of our critical pillars. We see that with transition finance, for example, the partnership with Temasek, for infrastructure and other opportunities for investing. We're looking at natural gas pipelines. We're playing a role in all of that."

BlackRock and S$403 billion ($298 billion) Singapore investment company Temasek launched Decarbonization Partners in April 2021 to create late-stage venture capital and early growth private equity investment funds.

BlackRock has arguably been hit the hardest by the pro- vs. anti-ESG argument, facing pressure from both sides. Meanwhile, state pension funds and investment committees are realizing the difficulty of implementing any anti-ESG laws. The $10.8 billion Kentucky County Employees' Retirement System refused to divest from BlackRock over local politicians' concerns, saying doing so would violate its fiduciary duty.

In addition, Mr. McCombe said, the intersection of infrastructure and sustainability will be one of the biggest opportunities in alternative investment. He pointed to the $125 trillion of new investments needed to achieve net-zero emissions by 2050, estimated by the United Nations Framework Convention on Climate Change.

Last year, BlackRock announced Gigapower, a joint venture with one of its diversified infrastructure funds and AT&T Inc., which will provide a fiber network to customers and communities outside of AT&T's traditional service areas. The network aims to advance efforts to bridge the digital divide and help spur local economies in the communities in which Gigapower operates, a BlackRock spokesman said.

Finally, there's BlackRock's technology juggernaut — Aladdin.

Blackrock's Aladdin software offers portfolio management, trading, risk management and other tools used by clients and other rival money managers.

Last year, Aladdin revenue grew to $1.36 billion, more than doubling from $528 million in 2015.

BlackRock's technology services revenues grew to account for about 7% of total revenues last year, and could increase to 10% to 12% in several years, analysts said.

Aladdin is so widely used that one community endowment board member asked rival managers — who noted that their firms used the platform as their portfolio risk management system — why they shouldn't just choose BlackRock as its sole outsourced chief investment officer. BlackRock won the 2022 mandate for $1.1 billion in assets.

While BlackRock's $8.59 trillion in assets fell 14% year over year, senior stock analyst Greggory Warren at Morningstar Research Services estimates BlackRock's AUM will grow on average 3% to 5% annually until 2027.

Despite attacks from both pro- and anti-ESG activists, BlackRock "continues to be a best-in-class money manager with really decent inflows in 2022 relative to its peers, especially from institutional investors and ETFs," said Catherine Seifert, vice president and equity analyst at New York-based CFRA Research

Given the rising interest rate environment for Treasury and other bond yields, there's more interest in fixed-income ETFs among investors, which is likely to increase inflows, she said.

BlackRock’s total equity inflows of $105 billion in 2022 were driven primarily by demand for its iShares ETFs, which held $2.9 trillion in assets at year-end. In 2022, BlackRock took in a net $220.3 billion in ETF flows. That’s down from $305 billion in 2021 ETF inflows, but ETF assets still represent about one-third of all BlackRock assets.

Finally, there's BlackRock's lightning rod leader. Mr. Fink "has a moral compass that is an advantage to the company," Ms. Seifert said.

"Despite the fact that the ESG issue is highly politicized, the moral stance of a lot of asset owners is not phenomenal, but I think the degree of energy now aimed at ESG may simmer down over time," Ms. Seifert said.

"We believe above-peer organic AUM growth and contributions from the Aladdin technology unit will support BlackRock," Ms. Seifert said.

Aladdin is the backbone of client relationships and a key differentiator for BlackRock vs. the industry, she said. Last year, BlackRock saw record net new sales of Aladdin contributing to 10% growth in annual contracts on a constant-currency basis, the same spokesman said.

"Clients are looking for better risk management and analytics," said the BlackRock spokesman.

It's possible that in time, BlackRock's Aladdin might even compete with the Big Four accounting firms.

"BlackRock positions its Financial Markets Advisory Group as a logical extension to its Aladdin tech platform offering. But BlackRock's reported work for Silicon Valley Bank in October 2020 to analyze the potential impact of various risks on its securities portfolio and to examine the risk systems, processes and people in its treasury departments puts it in direct competition with the Big Four global public accounting firms who have been collecting billions for governance, risk, and compliance services," said Francine McKenna, a financial analyst and due diligence specialist who teaches accounting at University of Pennsylvania's Wharton School of Business, in an interview. "It's surprising that the Big Four consulting arms lost out on this work."

The firm gave Silicon Valley Bank a "C grade" and identified weak risk controls months ahead of its collapse.