BlackRock Latin America Virtual Forum

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Latin America Virtual Forum da BlackRock

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O mundo atual em plena transformação

Larry Fink, cofundador, CEO da BlackRock, conversa com Dominik Rohe, executivo responsável pela BlackRock na América Latina, para uma conversa sobre o nosso ambiente macroeconômico em evolução, com foco nas transformações da nossa sociedade e dos mercados em meio à pandemia da COVID-19. Os principais destaques são as perspectivas do panorama geopolítico atual, as perspectivas do mercado, as expectativas para os líderes globais e a aceleração das tendências setoriais, como é o caso do investimento sustentável.

  • Dominik Rohe: Larry, good day, and thank you so much for spending some time with our clients today in LatAm at our event. While we’re not able to have you in person, and I'm not able to see you in person, it’s great to see you on the screen today. And maybe jumping into the conversation first, you know, 2020: really unprecedented times. Things have changed and things are continuing to change. What our clients are asking us quite often when we speak to them is if you look ahead, what do you think will actually revert back and what changes are here to stay?

    Larry Fink: Well, Dom, it’s good to see you, and I'm sorry we’re not in person.

    I'm sorry to all of our clients I'm not visiting you in your offices. […] When we have a vaccination, when we have the antivirals to reduce the severity and we open up all our economies, I will be hopefully in your offices within the next year. I don’t know if it’s going to be the next few months, but it certainly will be probably within a year.

    But probably, most importantly, when we talk about society, I think we have to look at what this year of COVID is going to be. It’s going to – it is accelerating the macro trends that happened, that were going on even before COVID. And importantly, these macro trends are going to be changing our behaviors, probably permanently. I do believe we have learned that we can communicate remotely through video and we can do our jobs pretty darn well working remotely. So, I don’t believe we’re going to all be back in office. I believe that most companies are going to have anywhere from 50% to 70% of the people in office. Maybe they’re rotating a group of people. Maybe some are permanent. But I actually believe these are wonderful outcomes.

    Can you imagine a future where […] we’re not fearful of COVID? Maybe we have vaccinations every year. And for those who get it, we are going to have an antiviral that really reduces the severity of COVID. And we’re going to have a very normalized life. Children are going to be going back to school, and we have all the returns of some normalcy.

    But, can you imagine a world where you don’t have to commute to work? Can you imagine what that does to the lifestyle of people who normally commute one hour each way, which is the average computation time for most people throughout the world? Can you imagine what that means, if 30% less traffic in Mexico City or Sao Paolo or Rio and on and on? Can you imagine a world?

    And so, I think, with this pandemic, and all the pain and suffering, and all the economic […] disruption, there are many things that are positive that we’re going to look back and say, “My gosh, look at the advancements in technology, look at how we go to work now, how we work from home at times, look at how we consume.” I think behaviors are going to be changing dramatically.

    I think about these young people entering the workforce now. These are the same young people were early teenagers when we had the Great Recession of ’08 and ’09. And now, they’re going to work right now - and they’re going to work and they’re working remotely. I hope these young people, who are the future, are not pessimistic about the future.

    The other thing I strongly believe: COVID is an existential health risk, and I think this existential health risk is very much another – a component of the risk we have with climate change. And I do believe in what we are witnessing worldwide with COVID, more and more of our clients worldwide are asking questions about climate change. And I do believe we’re going to be seeing an acceleration of interest in investing in sustainable activities.

    I mean, I can spend a lot of time talking about all the negatives. We know all about the negatives. There’s no question - COVID has impacted many more of the developing countries far worse than the developed countries. COVID has impacted the underserved, the lower income people far more harshly than the men and women who work at large companies. Small businesses have been more harshly hurt than large companies.

    So, there are many, many issues that COVID has really created - some real problems. But, you know, as a long-term optimist, I'm trying to find how we are going to be better as a species, how we are going to be better moving forward - having a better improved life because of COVID. And I think there are many good things that are coming from that.

    Dominik Rohe: No. Thank you. And I agree. Turning to markets now, the next couple of months, we’re going to experience a couple of other major events, […] political and otherwise, that determine the course of the markets for next year, definitely, and the years to come. What are your views on these changes and where do you think the market is heading?

    Larry Fink: Well, I mean the markets are going to be impacted by all the political issues. You know, we have more uncertainty again. What does Brexit mean? And we have that uncertainty related to Europe. We were starting to feel very good about Europe. The euro has rallied quite nicely from the base where it stabilized around $1.10 versus the dollar and it’s up about 7%-8%. Sterling has rebounded from its lows.

    And so, we now have more uncertainty in Europe. We have more uncertainty about the path of COVID in Europe too, in the short run, where Europe was coming back very strongly, and now, we have more incidents of COVID. We just had […] the announcement of the United Kingdom closing all offices again for as long as potentially 6 months.

    You have the US Presidential election and that outcome is going to have very different outcomes related to the path of the United States. The question is, does it create even more divisions in the US society? We’re going into the election with huge divisions from the far left and far right.

    All of these are going to have different impacts on the markets. The markets are also showing an incredible resiliency because of all the systematic investing by central banks. And unquestionably, because of COVID we’re seeing […] large industries, large segments of the economy becoming bigger winners. At the same time, we’re seeing large segments of the economy being big losers.

    You know, we have, in the hospitality industry, we’ve lost millions of jobs because people are not traveling and going on vacations. And at the same time, companies like Amazon announced they’re hiring 100,000 new employees. So, the big issue we’re facing – and this is going to have an impact on the markets – is, how quickly can we find solutions for the entire economy? We have not witnessed these type of systematic changes in human behavior, in consumer behavior. And that’s what I said: big winners and big losers.

    We need to find solutions for more components of the world economy, more components of the US economy and other economies to be more balanced. I don’t believe markets can rally […] if we don’t have a more consistency in our economies.

    And so, […] I can’t tell you if the markets are going to be up 10% or 15% or down or 10%-15%. There are some industries that have been very harmed. There are 10 or 15 stocks that are up considerably: some as much as doubling in price. And so, you know, you could argue that the breadth of the markets, despite where they are, is very poor.

    And so, you know, until I have better understanding of the political situation, of the dynamics between the United States and China, what does Brexit now mean for the UK and Europe? It’s hard for me to tell you […] markets are going much higher or much lower. But, for those clients who are focusing on their clients’ retirement, I don't think it matters. I mean, […] I always focus on long-term. I'm a long-term optimist. So, I think people can hear that from my answers. I am a short-term pessimist, though, and it’s through that pessimism we solve problems.

    I think we always should be addressing and asking ourselves […] how to address problems. And it’s through that process of addressing the problems, through that pessimism, we create long-term optimism.

    If there was ever a moment where we weren’t trying to fix the problems in the short run, you can’t be bullish on the long-term. And what I'm witnessing in the world today: a lot of pessimism. We’re addressing some of the pessimism now, which gives me a lot of – a strong belief that long-term we’re going to be fine.

    So, I answer to anybody who is managing people’s […] savings for retirement, you need to always be in the market. You have to constantly stay in the market. And so, to me it’s not about […] if the market’s up or down. It’s about it’s a 10- to 30- to 40-year horizon. And with those type of horizons, you want to be fully in the marketplace.

    I would also argue when you – when the US 10-year treasury hit 67 basis points, over a long horizon, that is not a good return. And I think what the central banks are still pushing, and this is why we’ve had these large equity rallies, they’re making it so expensive to own treasuries or gilts or boons or, you know, yen, the only place to be a long-term investor is in equities.

    Dominik Rohe: Yeah. I agree. […] You travel or used to travel a lot – now, you’re on the phone a lot - with other leaders around the world. Do they think similarly or what are the things that you’re discussing with them? What’s their mentality look like? What’s the state of mind?

    Larry Fink: Generally, all conversation is about short-term problems. We all focus on, “oh, this problem and that problem, this problem and that problem”. But, I would say many of our clients worldwide have been heavily investing in equities, in asset classes like infrastructure, which are long-term in nature, you know, in private types of investments, in alternative investments that have a long-term return profile. And at the same time, because there’s so much liquidity in the system, clients worldwide are heavily in bonds. Now, that’s maybe for a short-term investment horizon, but not a long-term one.

    But I think there’s a consistency around the world about all the uncertainty. I think our clients worldwide really want to understand: what is happening between the US and China and how should they look at it? Clients outside the United States are heavily interested in investment in China. I think that is a good long-term opportunity. Clients in the United States are taking a pause in terms of China because of all the geopolitical and political issues, which may be appropriate. I'm not here to say that’s right or wrong. But overseas, away from the United States, we’re seeing persistent investing in China right now with these opportunities.

    And so, I don’t think there’s anything that’s remarkably different, Dom. I think the key is to focus on a long-term strategy focusing on how best can we, through a long-term investment strategy, can our clients meet the needs of their retirement.

    Dominik Rohe: And from your perspective, if you look at global leaders, obviously some of them have been tested during this time. Do you think that the crisis has shaped or re-shaped the expectations we have of world leaders?

    Larry Fink: There’s no question. You know, there are many countries. I don’t want to go make the list. They’ve hired more populist type of leaders. In many cases, those populist leaders have not fared as well as – I think there’s a confluence of issues going on. One, there is a growing distrust of government and that’s been coming on longer and longer. And through that, there’s a greater and greater demand on stakeholder capitalism and companies to do the right thing.

    And so, I think, as people within their countries are seeing the limitations of what governments can do, they’re asking companies to play a bigger role. And I think it’s very important for the best of companies to play a bigger societal role. Obviously, the primacy of their responsibility is to the shareholders. But I'm a firm believer, and I write about this - about stakeholder capitalism - that you have to focus on your employees, the protection of your employees, especially during COVID. You have to be very focused in having a voice on behalf of your clients. And then, you have to be, in this era of a movement toward a deglobalizing world from a globalizing […] process, you have to prove more than ever before that […] you’re earning your license to operate in every locality where you’re operating.

    So, for BlackRock, we must be Mexican in Mexico. We must be Brazilian in Brazil and Colombian in Colombia and on and on. It is very imperative for us to really earn our license. And when I'm saying for us - it’s true for every company, every management team, every leadership team, every board of directors. We need to prove that we are focusing on all our stakeholders.

    When companies focus on their employees, you have more motivated employees. When companies focus on their clients, and clients like your voice, clients will allow you to be involved with more of their share of wallet. And importantly, if you don’t have a voice and if you’re not active in the communities where you’re operating, you’re going to have a harder time meeting the needs of your community. For those companies who do those three stakeholders well, their shareholders benefit with sustainable, durable, long-term profitability.

    Dominik Rohe: What I also wanted to talk, and you touched upon it a little bit, is you every year write your letter to the CEOs and I think, you’re probably going to start soon thinking about what this letter is or start writing it for next year. And we pledged to place sustainability really at the core of our investment process and just like we look at credit risk and so on, we look at sustainability just as part of that, when we think about investing. I would love for you to talk a little bit about BlackRock and what you see in the progress we have made, where we still need to go, and how it will shape the industry.

    Larry Fink: Well, as the largest asset management company in the world, as the largest manager of retirement assets, we understand that we have an enormous responsibility. The entire pool of money that we manage is not our money. It’s our clients’ money. And we have to be a fiduciary to every one of our clients. We have to be a fiduciary to that client who is invested in our mutual fund and invested $1,000. We have to be just as much a fiduciary to that client who has invested $1,000 in our mutual fund, to one of the sovereign wealth funds where its invested billions of dollars.

    And so, that’s a foundational issue for us. But we also have to have, and our clients are asking us to be, a louder voice. We have to be a loud voice to what I would call one of the greatest crises in the world today - and that’s retirement. And I call it the silent crisis. When you think about with the persistence of low interest rates, and the Federal Reserve announced that they’re going to keep interest rates low for the next 3 years. Within some countries, governments are allowing during COVID people to spend some of their retirement money. The reality is there are in many, many places of the world retire – there’s an inadequacy of retirement monies.

    And so, we have to be a louder voice and that is our responsibility. And on sustainability, when I wrote the CEO letter last year, this past year, I wrote a central theme that […] climate change is investment risk. And we are certainly seeing that in 2020: the impact of climate change on areas, on investments. And we are seeing more and more evidence that climate risk is investment risk. And so, we’re working very carefully right now and making sure we are doing everything we can on behalf of our clients to give them better analytics, better data, so they can understand how climate risk is impacting their investments. And we believe this is critical for the future.

    In many parts of the country, especially in the United States, we certainly have issues on S, on the social issues, as we witness so many inadequacies in our social structure and we have great inequalities. And the S part of corporate governance is now even becoming larger and larger too. And BlackRock even admitted itself that we are not – we have not done enough for our own population of empowerment of more people of color and more women.

    I made a pledge earlier this year to […] really ramp that up and we’re going to be asking companies in our corporate stewardship to keep making sure they’re doing the right thing. And so, this is all part of corporate responsibility now. This is all about stakeholder capitalism. And I believe, the best companies in the world are going to be those companies who are focusing on all their stakeholders and making sure that, through that effort of working with all your stakeholders, you have more durable profitability and, as I said, your shareholders are the biggest beneficiary of that.

    Dominik Rohe: I find it’s also interesting, you know, if you look at Latin America - where sustainability is now: people are talking about it, people are requiring it, pension funds are really putting it into their RFPs in organizations. In the UK, we saw that earlier on and a quick move into that. Do you think that the pickup around the world, the acceleration of that, will even pick up speed, and it will become really the center for many of these organizations globally?

    Larry Fink: Worldwide we’re seeing more and more investors understanding how climate risk is investment risk. In 2020, in the first six months, we raised more money in sustainable strategies than we did in all of 2019. And 2019? We raised more than double than we raised in ’18. And so, we’re seeing this acceleration of client interest in sustainable strategies and we believe this is only going to accelerate. And through that process of movement away from, let’s say, hydrocarbons, or movement away from one thing, […] you're seeing this reallocation of capital that I write about. We’re seeing very clearly a reallocation of capital.

    There was an article about in California, with all the fires, insurance companies are raising their rates, and the governor is trying to stop that. That's another reallocation of capital. When it’s very evident that you’re in a fire zone and you have persistent fires, insurance companies have no recourse but to raise the rates because they’re having more and more claims.

    We’re seeing that in areas where you're seeing more wind damage and more water damage. So, in more and more places, we’re seeing more and more evidence of physical impact on our economies and […] through that, we’re seeing a greater and greater amount of reallocation of capital.

    Dominik Rohe: I would love to thank you for the time that you gave to us today to speak to our partners and clients. And I look very much forward to seeing you in person again soon, hopefully, and also, travel with you to the region and to see our clients. So, thank you very much, Larry.

    Larry Fink: To everybody who is listening, BlackRock is committed to the region and we wish you a healthy future and a safe future.

    Dominik Rohe: Thank you very much, Larry.

As eleições dos EUA e a América Latina

Tom Donilon, presidente do BlackRock Investment Institute, e Roberta Jacobson, ex-embaixadora dos EUA no México, analisam os possíveis desdobramentos das eleições presidenciais norte-americanas de 2020 e o seus impactos na região.

  • Tom Donilon: Thank you, Karina, and I'm delighted to be here today to participate in BlackRock’s Latin American Investment Forum. I think this is the fourth year that I’ve participated, and it really is one of my favorite events that’s full of terrific ideas and energy and it’s really great to be here today. And, as Karina said, we are just delighted to be joined by Ambassador Roberta Jacobson today.

    Roberta is one of our, as was said, one of our leading practitioners and experts in foreign policy generally and in Latin America specifically. It’s a personal privilege for me, Roberta, to be with you today for our discussion and to talk about –

    Roberta Jacobson: Thank you, Tom.

    Tom Donilon: – things around the world. Great. It’s great to see you and to talk about things around the world, particularly in Latin America. So, why don’t we jump in and –

    Roberta Jacobson: Absolutely.

    Tom Donilon: I’ll start – terrific. I’ll start broadly. So, 2019 was a year of unrest in Latin America. Again it, obviously it’s a complicated place, but generally a year of unrest and 2020, of course, has brought this global crisis of the coronavirus globally, as I said, but also specifically to Latin Americans in very difficult, some very difficult ways. And so, really kind of three questions to start off with. One, how should we be thinking today in the wake of and in the midst really of the coronavirus crisis? How should we be thinking more broadly about Latin America today? What are some of the specific impacts that you see today and long-term for Latin America from the virus? And what do you think the impacts are going to be on Latin America’s politics and its economy and its society? So, I’ll start with an easy question.

    Roberta Jacobson: Thank you so much, Tom, and it’s great to be here. I wish we could be in Miami together. But, you know, I think when you look at the region as a whole right now and, as you said, it’s very complex. But, the pandemic responses, which obviously this started off as a health crisis, those responses were, frankly, both confusing for businesses and for citizens and very uneven. Misalignment of integrated supply chains will require much greater coordination in the future.

    But that pandemic and health crisis has turned into an economic crisis. You have overall contraction in the region likely to be somewhere around 9%. But in some of the bigger countries, Mexico for example, you’re looking at contractions of 10% or more and you have thousands, if not millions, of Latin Americans who are falling back into poverty. You’re seeing poverty rates increase in ways they have not in decades out of the middle class. So, even in countries like Colombia, which have done well economically and on their COVID response, you’re going to see a contraction, let’s say, of about 4% this year before a return to growth.

    I also think that that poverty rate increase is likely to push up your social unrest. And while I think that we can hope that things remain relatively calm and that governments have a handle on this, I do think outbreaks of social unrest are more likely as you see the difficulties that populations are facing. But you also have, finally, a situation in which most countries have gone to stimulus programs which were very important for populations to survive and to have not – not even have greater poverty rates. But now, those countries are going to have to tighten as countries move, try and move back to growth. You have a major country such as Mexico, which did nothing in terms of stimulus, so very uneven.

    On the politics side, on democracy, I am not particularly optimistic. I wish I were. You continue to see populism and authoritarianism on the rise in the region and I think traditional political parties have not responded to the needs of the people. And so, what you’re left with are personalistic political vehicles that do nothing to strengthen the institutions in a sustainable way that adds resilience to governments and responsiveness to the people’s needs. So, I'm concerned about both the political side and the economic side moving forward.

    Tom Donilon: Thanks. And we have a tumultuous set of events north of the border as well in the United States. I wanted to turn, if we might, to the election just for a couple of minutes. We obviously have our election coming up two weeks from today in the United States. It is, I think you’d agree, both consequential and contentious by historical standards. The outcome here, where we have very different outlooks both in platforms with respect to domestic politics and international politics, really couldn’t be more different between President Trump/Vice President Biden, and it has been a contentious backdrop, maybe one of the most tumultuous backdrops we’ve had for an American election I think in a long time, maybe half a century if you think about it’s being carried out in the midst of, as you described in Latin America, a health crisis, a financial crisis, social unrest, and really politics like we haven’t seen in this country. So, it’s a tumultuous, tumultuous backdrop.

    So, yes, I think consequential and contentious. And, as I said, we’re two weeks out. You know, the state of the race is that Vice President Biden has had a lead pretty stably nationally. But the so-called battleground states are closer, much closer in some respects and we still have two weeks to go. We have Senate races in the United States, which are going to make a big difference in terms of policy and that seems to be a toss-up at this point. And we have a big next event in the United States, which is the second Presidential debate will be on Thursday night, October 22nd.

    There are concerns here about the conduct of the election I think, and I think it’s important for investors and observers to note that, that there are concerns about disruption and delay in reporting. The elections are being conducted here under very trying circumstances in terms of the virus and the mechanics of the election, a big increase in mail voting in the United States, and the real possibility of disputes after election day as I said, with big policy implications I think, as I said, both domestically and internationally.

    So, my question to you with that backdrop is Ambassador, how do you see the impact of the US elections on Latin America? What do you think that, you know, both in terms of politics and economics and trade and, you know, other aspects, what do you see as the impact of the elections, depending on the outcome?

    Roberta Jacobson: Well, I think you’re right, Tom. I think these are perhaps the starkest choice Americans have ever had in an election year and my friend, Beta O’Rourke, refers to these as the most important elections since 1864. So, he goes back further than about 50 years. But I, and I think he may be right on that.

    I think the difference vis à vie Latin America and many other areas of the world, but particularly in Latin America, first, you have a difference in the two candidates in tone and rhetoric. That's vastly different between President Trump and Vice President Biden. The second, I think, will be looking at trade. I think there will be a focus in a potential Biden Administration of fair trade, but without what we’ve seen under President Trump, which is the constant threat of tariffs and the use of tariffs as retaliation against non-trade issues and that’s somewhat, you know, unique, frankly.

    I also think you’re going to look at a foreign policy in Latin America, among other places, that won’t be all stick and no carrot. What we’ve seen, especially in Latin America, is a policy of punishment, more and more and more sanctions. And I think that’s had, to be fair, you know, uneven effects at best.

    Third, obviously, there’s a very big difference between the two leaders on climate change and that has a very significant impact on Latin America and, in particular, the Caribbean, which we’re seeing the effects of climate change very significantly. Finally, I would say that for Latin American countries, they look at a Biden/Trump race right now and they see very different perspectives on democracy. The return to part of US foreign policy under a President Biden of democracy, human rights, and the rule of law and anti-corruption is something that, frankly, is both welcomed by some leaders and feared by others.

    So, I think the impact is significant. The region tends not to play a huge role in global foreign policy. But I think the ... not be resolved by solely one country or even bilateral efforts means that the impact is going to be very great in the region.

    Tom Donilon: Yeah. Let me – let’s turn to a couple of the key countries, if we might, and first with Mexico. In office now for nearly two years, AMLO, and obviously a place where you’ve served as our ambassador as you secured, you know, an important achievement I think with respect to the reupping of the USMCA and seems to have found a way of working with President Trump on immigration issues and we might want to focus on immigration I think a little bit.

    But he’s challenged by a number of things which you talked about. A significant challenge is on the economic front in Mexico and a difficult security situation. And so the question, again, as a former US ambassador to Mexico with deep knowledge there, what’s your outlook on our southern neighbor and how could the relationship change do you think in the event of a – or if a Biden Administration came into office? And maybe also focus a little bit on how you see the immigration situation on the US southern border evolving.

    Roberta Jacobson: Well, it’s fascinating because I am an optimist by nature, and I believe deeply in the US/Mexico relationship. And yet, right now I'm not very optimistic about Mexico per se. I think there are a number of reasons that we are worried, that we should be worried. Obviously, the severe contraction economically, which impacts the United States very significantly in terms of our market and the middle class to buy our goods. Very significant decreasing foreign investment due largely to very capricious actions by President Lopez Obrador and this use of referenda, of plebiscites or consulta públicas, to decide on major investments, the airport in Mexico City, a brewery on the northern border of Mexico, and even just the other day an energy product – project in Ensenada, in Baja, California. So, these are really driving down, in a way, investors.

    I also think that it’s interesting to look at how relationship will change potentially under a Biden Administration. These are two leaders, Trump and Lopez Obrador, who should not have gotten along given the rhetoric during the last campaign and some of the policy issues on immigration that the Trump Administration implemented. And yet, they get along remarkably well. Now, part of that is because President Lopez Obrador has accepted things that President Trump has asked for and initiated, such as the migrant protection protocols or remain in Mexico and keeping migrants in Mexico while their asylum claims are processed in the US that no other Mexican President would probably accept.

    He’s able to do that for two reasons. One, he, as he stated to me once, Lopez Obrador believes that a positive relationship with the United States is his most important priority. So, everything else becomes secondary to keeping the giant happy in the north. But second, because he has an approval rating that is remarkably high and has been fairly durable. It went down during periods of the COVID crisis/pandemic. But it’s gone back up as well, despite the economic numbers against sort of all odds.

    So, I think there will be very great distinctions. Some of that will be on climate change and renewable energy where President Lopez Obrador has made his entire economic bet on PEMEX and oil, a Mexico state run oil company. Some of it will be over the weakening of democratic institutions and changes there. But you’ll also have a very different policy on migration under a Biden Administration.

    The Trump Administration has squeezed migration options to almost none from any country, both legal and undocumented. Mexico has played its role in helping to reduce migration at its southern border, especially from Central America. But that’s not sustainable over a long period of time. The pressures build. They eased under COVID, but we are already seeing migration numbers go up, in particular by Mexicans, which had been at a historic low.

    I think the trick will be to some extent how to regularize migration, how to enable it to be predictable and orderly and not overwhelm the US borders if migrants believe that under a Biden Administration borders will be much more open. And you don’t want that first crisis of an administration to be a renewed surge in migration. But, there’s no doubt President – Vice President Biden has said that he will seek an early meeting with Lopez Obrador to discuss, in particular, a joint economic and security strategy, two areas where beyond USMCA, which clearly was an achievement, there has not been the use of MCA to further deepen economic cooperation and there’s virtually no security strategy on either side of the border in countries where you're seen more than 75,000 Americans die from overdoses, especially from opiates and fentanyl and more than 40,000 Mexicans die in a year or close to 40,000 Mexicans die from homicide in a year.

    Tom Donilon: So, a, an important policy challenge of the coming year in terms of stability on the border, as you see it.

    Roberta Jacobson: Very much so. Very much so, yes.

    Tom Donilon: Yeah. Interesting. How about Brazil? Obviously, another, you know, critical player in Latin America. It’s had grave difficulty dealing with the coronavirus with one of the highest case rates in the world. The economic fallout has not been as dramatically negative I think as people had feared and they’ve been able to deliver a substantial stimulus program in response to the virus.

    But I wanted to talk longer-term about Brazil in a couple of respects. What are the longer-term challenges coming out of this for Brazil? We have debt sustainability issues obviously and widening inequality issues, not just in Brazil, but focus on Brazil. We have widening inequality issues coming out of coronavirus I think globally where we really could see, as you were alerting, alluding to earlier, Roberta, we could really see the fall, falling back and really kind of undermining poverty eradication gains that we’ve had the last two decades, which is really, I think, going to be a big impact here and we’ll see and I think we will have a, we will have an inequality, kind of a … called the coronavirus the great unequalizer in a commentary he did the other day.

    So, how do you think about the longer-term challenges for Brazil in terms of debt and poverty, inequality? Are there additional steps that you could see Brazil taking to facilitate greater stability and growth and equality going forward? What’s your general view on the economic situation there?

    Roberta Jacobson: You know, I think the joke about Brazil is it’s the country of always a country with potential, right. It’s never lived up to its promise. I think Brazil was actually beginning to do that before the Lava Jato and the corruption scandals that brought down both Lula and Dilma after him.

    Bolsonaro has been obviously in many ways the antithesis of his predecessors, not a party guy, very much a populist, very conservative on a lot of issues that most Brazilians are not, such as social issues, another leader who has had a very good relationship with President Trump, but a country that, as you noted, Tom, has seen real disaster from COVID spread and one that was deeply affecting its economic situation. I do think that Bolsonaro, unlike AMLO, did a smarter thing by pumping stimulus into the economy and in doing so he not only mitigated the impact, economic impact of COVID, he also obviously raised his own personal popularity. The fear that I think analysts have right now is whether that populism, the siren song of it, becomes such a lure that you won’t go back, right, that you won’t turn towards the fiscal discipline necessary now moving forward.

    I think there are a couple things that the government needs to do very quickly. The most important of those is passing of tax reform. It’s got to pass this tax reform as quickly as possible. Pension reform was the previous challenge. That has passed. But these two measures, both pension reform and tax reform, were essential from the beginning of the Bolsonaro Administration and tax reform remains out there to be done. And in doing so, Brazil needs to find ways to reassure investors about its fiscal discipline, that it won’t be profligate thereafter.

    I also think that, you know, Brazil need – Brazil is going to have a bit of a governance crisis, right. Bolsonaro’s numbers, as I said, did go up during the COVID crisis. But there are issues about – around which Brazilians are deeply unhappy in terms of its development and where things are going in Brazil. That may be climate. That may be diversification of its economy away from solely China, which many countries are looking at in the post-COVID world. And it may be, and this is something that I think all the countries of the region have to look at, you know, Brazil was always the impediment to a free trade area of the Americas. It was not well – willing to jump into that free trade agreement boat.

    And so, the United States and many other countries went about, in essence, creating that free trade area piecemeal, right. It was NAFTA. CAFTA-DR. It was US-Chile. It was US-Peru, etcetera. And, of course, many of the members of the Pacific Alliance on the western coast of South America but including Mexico looked towards transpacific ways of doing business and commerce that would improve their own economic circumstance. That resulted to some extent in TPP, which the Trump Administration pulled out of.

    There’s a real question in my mind, a viable one, as to whether now is a potentially good moment to relook at a free trade area of the Americas that includes Brazil and that right – might really make a difference, both for the individual countries, Brazil and others, but also for the region as a whole and obviously the combined market for the United States is absolutely critical at over a billion people. So, I think this is an area where Brazil needs to both send signals to its foreign investors that it’s open and business-friendly and will have that fiscal discipline. But it also will be interesting to see if it sends signals that it’s interesting to talk about free trade in a way that it has not before.

    Tom Donilon: Yeah. That's interesting. Let's take a scenario where there’s a change in administration in the United States. And as you said, you know, President Bolsonaro has had a good relationship with President Trump. How would you see that – what would you see the prospects for the relationship in the event of a change in the United States on – including whether or not a Biden Administration would pursue in your judgment a free trade regional arrangement? And also maybe a – talk a little about, a little bit about climate as well, which in a Biden Administration would be, as he said on the campaign trail and has put forth in his proposals, would be a big priority for a Biden Administration. How would you see this relationship, both personally and in terms of policy, developing in the event we had a change in administrations after the elections in two weeks?

    Roberta Jacobson: You know, I think that it’s a great question. Having watched Joe Biden travel throughout Latin America, I did either 18 or 19 trips with Vice President Biden in the region and I saw him work with leaders of all different stripes. And one of the most impressive things I ever saw was him, his first meeting with Dilma Rousseff of Brazil in which, you know, he really had a remarkable conversation with her. He was able to talk to her politician to politician in ways that I think she wasn’t used to and in – with a frankness and an understanding of her own political constraints that I think Joe Biden does better than anyone.

    He understands the constraints in which the country he’s visiting is living. But he tries to really sort of put himself in that president’s shoes and explain why this would be beneficial to both of them, economically, politically, etcetera. And I saw him do a remarkable thing and create an ally in the Brazilian President then that I don’t know that I thought was possible. And so, I think his ability to have strong personal relationships with leaders is among his greatest features.

    That doesn’t mean giving them a free pass on things that are important to us, whether that’s climate change or fair trade or labor rights. But it does mean that he will be able to find ways to craft policies that are motivational and incentive and have carrots and not just sticks. But he will be very tough when he needs to be. I have seen those conversations, too.

    I think that there are – there’s another actor in this that we should not forget about, whether it’s climate or democracy or trade, and that is civil society. From the private sector, from NGOs, from all – from the press, the pushback against civil society, both in the United States and in places like Brazil, in places like Mexico and elsewhere, is something that will need to be addressed. And I think Biden understands that you want to engage, you have to engage governments. This is a government to government relationship. But you also need to engage civil society more broadly and that includes chambers of commerce, government/business organizations, business leaders. The US CEO dialogues in both Mexico and Brazil have been fairly moribund. Those need to be ratcheted up so that they can give good recommendations to the President.

    But, I also think we’ve seen in Brazil in the last couple of years a reburning in the Amazon and other activities that really are going to come under the microscope in a Biden Administration and they’re going to present a challenge, because we know that the future is in sustainable development, sustainable businesses, and that is a very backward looking policy. I view it the same way as I view AMLO’s, you know, mega bet on PEMEX. If you’re putting all your eggs into fossil fuels, that’s just not the future.

    So, I think all of these countries we will find welcome from many who have been dismayed by the sort of anti-climate, anti-environmental policies of the past few years. But we will also have some tough challenges with governments who have not incorporated sustainability or climate issues into their economic and commercial policies in ways that they really must to have long-term growth in the future.

    The final thing I would say is that we know from many, many studies and examples that people who’ve reached the middle class and fall back into poverty are a much more volatile and disappointed group than those who have remained in poverty most of their lives. And so, that's one of the reasons that I see social unrest and security as a particularly important issue to be discussed with countries in this region.

    Tom Donilon: Yeah. It’s interesting, Roberta. You remind us just that in fact Biden did handle a lot of Latin American policy during the Obama Administration and, as you said, made many, many trips there. He – and I – as you said, it’s an interesting set of points that you could imagine – I’ll ask you – as you say, you can imagine they’re being put – put a higher priority on democracy and rule of law issues and also on climate, which has a big impact on the region, obviously. And, of course, Biden spent a lot of time on the Northern Triangle issues.

    Roberta Jacobson: Exactly. Exactly. And what I was going to say in addition is we know that in addition to security problems, it is economic and agricultural problems in the Northern Triangle countries that is one of the main factors driving migration. And what Biden talked about was making a difference at the root causes of migration, not just trying to put band-aids if you will or walls in the way of migration. You can’t do that without a better climate policy, especially for those countries in Central America.

    Tom Donilon: Yeah. We could go on for a long time about that issue, because real – really, it’s high, just a huge impact there. But, we only have a few minutes left and I wanted to make sure that we didn’t conclude today without talking about really one of the more troubled places in Latin America, which is Venezuela, and how you see things developing there and what you think that – what is the outlook for the US/Venezuela relationship going forward and what's the outlook in Venezuela itself, including this really I think underappreciated impact in the United States on its neighbors, including Colombia.

    Roberta Jacobson: Yeah. And I do think that’s important. The vast majority of refugees out of Venezuela have gone to Colombia. Colombia has been remarkably generous during a period that was very, very difficult. And I think overall what I would say is Venezuela presents a really, really thorny problem for the United States under any administration.

    There was some hope for movement in Venezuela when Juan Guaidó was elected the legitimate president by the National Assembly last year. That has dissipated to some extent, mostly because, unfortunately, Maduro has not been willing, the de facto president in Caracas has not been willing to really entertain any possible opening or to set up a situation in which the national election, assembly elections that are coming up at the end of this year or early next can be at all on a level playing field. And so, the last democratic institution in Venezuela is likely now to go away and that really makes things all the more difficult.

    And I think finally what I would say is we are confronting a situation somewhat like that in Syria of a leader who cannot be sanctioned out of office. He does not respond. No matter how his country and his people are destroyed and the tragedy of Venezuela just gets worse, he does not respond to these sanctions in ways that look for a way out or to improve the lot of his people. He is impervious to that shame, if you will, and that makes it much harder to deal with.

    I do think a Biden Administration return to multilateralism is the way to go and not look at military action. But it’s a very, very tough nut.

    Tom Donilon: Yeah. Well, they’re telling me that – telling us that our time has run. We could do this for a long time. Roberta, thank you for this amazing tour and sophisticated tour of the horizon, both today and into the future, in Latin America. Really, really appreciate it. It’s a personal pleasure for me to see you and to talk about these issues. So, we’ll conclude our session. Again, thanks, Roberta.

    Roberta Jacobson: Thank you.

    Tom Donilon: And it’s a great pleasure. And Karina, back to you.

A evolução do panorama de investimentos na atualidade

Rick Rieder, diretor de investimentos da BlackRock para Global Fixed Income e diretor do Global Allocation Investments, e Kate Moore, diretora de Estratégias Temáticas do Global Allocation Investments da BlackRock, oferecem suas perspectivas para o mercado.

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    Kate: Awesome. Thanks so much, Karina. I’m really excited to be joining all of you guys today and also to be having this conversation with Rick. I can also say, while this is great that we’re doing this in a virtual format, I do miss the annual conference down at the 1 Hotel in Miami, slightly warmer than where I am right now. So, Rick, welcome. I’m excited to kind of delve into some of these topics with you. I wanted to start off with what I think is the biggest question of the day or the year of all, maybe the decade, and it’s around policy response. Coming out of the GFC, one of the people I worked for was often repeating the same phrase over and over again that markets stop panicking when policymakers start panicking, and the bigger the policy response, the more comfortable markets have become. But I’d love, Rick, for your decades of investment experience kind of grade how policymakers have done this year, not just in the US but I think kind of around the rest of the world.

    Rick Rieder: Great. Thanks Kate. I don’t have a decade – I mean, God it’s hard to think about decades, but it is true. The – anyway, thanks for doing this and… The – so I’d say a couple of things. First of all, I think you’re exactly right. I mean the markets are getting wagged literally today, literally every day, by what happens to policy, and it is by far the biggest thing impacting markets and will be for a while. Anyway, maybe I’ll start with the US and start with the sheer size of the fiscal policy that’s come in and what’s expected to come in. So, I mean obviously we’ve got a big election coming up. No matter what happens, we’re going to get a big fiscal plan that is going to be enacted. If it’s a Trump presidency and obviously depends on the Senate, you’re still going to get at least over a trillion dollars of stimulus coming in, and obviously where I think people have probably rightly moved towards is if you have a democratic candidate, president, and then you get the Senate moving, you’re going to get well over $2 trillion.

    I sort of put that in perspective, Kate, to your question about grading it. I don’t think people have… how big this stimulus is. I mean you throw around trillions like it’s just another number; $2.1 trillion in the last fiscal initiative was almost 10% of GDP, 10% of GDP. And so, the impact on income has been extraordinary. I mean it’s – we’ve shown these charts. We’re actually doing a bunch more on this… where you’re creating – it’s actually the way we run it, there’s significantly more income in the system today than there was pre-COVID, and I think people underestimate that when you look at the retail sales data or you look at the car sales or you look at housing sales, the numbers are… Anyway, I would say the grade heretofore on fiscal has been a good grade.

    Then if you go to monetary policy, I think it’s been an A+. I know I’ve said that a bunch of times. I think the Fed has done a really, really good job of not just – everybody focuses on interest rates. It’s not just interest rates, and quite frankly I don’t even think that big a factor was interest rates because quite frankly I think you could have left interest rates even a bit higher. The big deal is they addressed the top part of the capital stack. I don’t know if you remember in the crisis, but what was happening—the crisis meaning mid-March and April—you couldn’t get financing done because the top part of the stack was not moving and things like commercial mortgages… etcetera… and I think… and then the liquidity they put in has been tremendous. So anyway, I think the Fed deserves a superb grade.

    Maybe real quick I’ll hit some other countries around the world, and again I’ll be faster on other answers, but I just think it’s such a big deal. Europe, I think, for years I think got a bad grade, and I do think the Euro… fund and the mutualization of the debt—Italy, Spain, Portugal, etcetera – taking some of that risk out. And now you’re getting real fiscal impulse. Europe is actually a reasonable investment paradigm. I still think the negative rates – I still don’t give a great grade. In fact, my view on it is closer to an F in terms of negative interest rates. I don’t think it works, and I think the reason why you’re seeing the banking system continue to have no capital – market-based capital I think is as a result of that.

    Real quick hitting on some of the others, first of all, I think you have to give China a superb grade. I mean the rate of growth in China on the backside of this, somebody can see they’re the one country that’s actually not going to have a negative growth dynamic. They’ve lent. They’ve eased policy in a bunch of different ways. They’ve let credit grow. I think at peak they’re almost 14% this year. And then the… has signaled they’ll do more, so I think China is pretty impressive. I mean the growth across the board in China including the data we’ve seen the last couple of days is pretty impressive, maybe because… Maybe I’ll hit a couple of points on Latin America, which I think are also significant around this question.

    I – LATAM has been tougher around a couple of things. One, while the – while government lockdowns were severe, the compliance in many countries in LATAM was not as high and for a variety of reasons. Medical preparedness was not terrific, but it seems like the medical situation has stabilized. And so, there is – we were going to talk about this on Thursday. We actually think there’s some investment to do and some opportunity in LATAM… talk about policy really… The policy was very aggressive, and you’re seeing that play out in terms of the economy recovering faster, but you also have a debt burden that is significant, so something that we’re going to spend a bunch of time on. The medical problem in Mexico wasn’t as bad, but unlike Brazil, the improvement hasn’t been as fast. And I think policy has generally done a good job but think about where monetary policy moves rates to. It slashed rates by 275 basis points, but it came from a… starting point.

    So, the situation in Mexico is still – we think you have a dynamic that the… is still tricky in Mexico, but actually the balance sheet of Mexico is still pretty good. So, some – there’s some debt opportunities. And the last I would say Argentina, which I think is well-chronicled. Policy has been uneven, and I can go into it if you like later, but anyway, Argentina has become a tricky dynamic because of the size of the leverage, so – and the currency and inflation. So anyway, I’ll stop there, Kate, for a quick tour of the world.

    Kate: Rick, well, I mean it sounds like everyone gets pretty good grades except for… the ECB with the negative rates, but in general, we’ve had just a tremendous amount of policy support. So I guess I would ask – I want to go into this point that you were making in terms of the liquidity in the system because this is a huge part of the overall policy reaction, and some people worry that it’s going to peter out, but maybe some thoughts on what that looks like in 2021.

    Rick Rieder: So, I mean I still think liquidity is going to stay extraordinarily high. You’ve got a Federal Reserve that is committed to functionally diffuse the amount of debt that the Treasury is going to issue, and the Treasury is going to issue more debt. No matter what, we’re going to get another fiscal package of significant size, and so I think the Fed is going to increase the size of their asset purchases. I think the Fed is going to – they’re buying 80 billion a month of treasuries. I think they’re going to get that number bigger. I actually would say the flipside of that is they’re buying 40 billion a month of mortgages. I don’t think they need to keep buying 40 billion a month. I could see… where the Fed keeps buying, keeps diffusing the amount the Treasury is going to issue but then has to increase the size of the treasury purchases to keep rates fairly contained. And then I think you’re going to see the same thing, the ECBs increasing their… programs, so I think liquidity around the world is going to continue to be high, and I don’t think that’s going to shrink at all for a long time.

    Kate: I mean I think that liquidity story is so incredibly important and powerful, and it’s obviously super powerful in the equity market, but I wanted to go back to a point that you were making, Rick, in terms of fiscal policy in 2021. And in particular there’s been a lot of debate of course around what happens in different election scenarios, what happens if we have a democratic administration or a continuation of the Trump administration. And the point I keep making is that we are still in a pandemic. The global economy is still in recovery mode, and it’s really hard to imagine any administration around the world not engaging in a lot of fiscal stimulus and that this has to be supportive of risk assets and the additional liquidity that you’re talking about coming from monetary policy. I mean it’s a pretty good backdrop for overall risk taking. Would you agree?

    Rick Rieder: I mean I completely agree. I think it comes down to… Kate, as you described. They’re going to do – you’re going to see more fiscal impulse, and I think when you step back and think about the math and we’re going to do… this week, if you think about when you grow the monetary base and you think about what the Fed is doing, you’re pumping the system with huge amounts of liquidity. You grow the monetary base, and you put fiscal on top of it, and you didn’t have – you think about in Europe where you didn’t have that for years and the US where you didn’t have this hand-in-glove monetary and fiscal for years. But when you take – you grow the monetary base and then go back to that MV equals PQ, if you grow the monetary base, then you get velocity grows. You get capex spend. You get R&D spend. When you put the numbers together, the growth becomes – and you’re seeing it play out, and people continue to be overwhelmed by, my gosh, these numbers are pretty good in what you’re seeing on the economy.

    But, Kate, like you say, if create nominal growth, and people worry about – you can’t disregard the debt that’s coming to support it, but if the Fed takes that debt and functionally puts it on their balance sheet, and by the way, it’s not that scary when you think about the size of the balance sheet relative to GDP, you create a growth factor… for risk… anybody companies earning cash flow stays pretty buoyant in that environment.

    Kate: Absolutely, and it’s one of the reasons why you and I definitely agree it pays to be in equities and to be in risk assets in this environment. But you were talking a little bit about this, this coupling of monetary and fiscal, which I think is unbelievable. It’s certainly something I’ve never seen in my lifetime or in my investing career. But there’s another thing that’s always kind of weighing in the back of my mind as we think about this huge amount of liquidity and this huge amount of stimulus, and it’s that saying from Milton Friedman, the quote: Inflation is always and everywhere a monetary phenomenon. And so, the big question ends up being do we have to worry about inflationary pressure at this point if we are giving this huge amount of unprecedented policy response? And from an equity investor’s perspective, I think about inflation both in terms of what it does to the multiple and then also in terms of which companies can navigate it. But I just want to ask you before we get into the asset class conversation, how are you thinking about inflation? Is it a risk?

    Rick Rieder: So, Kate, I remember last year and the year before the story that I think was being promulgated around financial circles was wages… low levels. When wages accelerate, inflation moves higher. It’s just not true. And it wasn’t true, and it will continue to not be true that the system – that inflation is not created by higher wages, point one. So now you go, okay, so now the next story is that inflation moves dramatically higher… and we’re growing the debt burden on the US economy. I just – by the way, I think there’s some parts of that. I do think inflation is moving moderately higher, and I actually think TIPS in a portfolio make some sense as long as you’re not paying for it.

    But boy, I don’t – so you think about what is the transmission of you grow the monetary and pay the debt, but the currency comes under pressure. But I think it’s grossly overstated. I mean imports in the US, you think about what’s the transmission of inflation in the US? Imports are only 12% of the economy, and it’s not that significant. And I don’t think the dollar is going to come under tremendous pressure. I mean when you take a step back, think about the dollar. It’s 50% of global trade invoices. It’s a third of the countries in the world are actually explicitly pegged to the dollar, and 70% of the world’s GDP is actually at least soft-pegged at the dollar. I just don’t think it’s Argentina, and I don’t think you have a dynamic that, gosh, the system… is massive inflationary problems.

    By the way, part of why I think Chair Yellen said this yesterday that the system can absorb more debt, and I think it’s right because you’re not going to pressure the currency. You’re not going to create an inflationary dynamic, and there’s two structural forces at play, Kate, that I know you talk about all the time… you just don’t create that much inflation when the population ages because potential growth is slower, and so you don’t create that organic demand that you had like in the ‘80s or ‘90s, and the second being technology is just putting a – is changing the whole way that commerce works today. There’s no pricing power in the number of areas. When you don’t have a commodity-oriented economy like you had in the ‘80s, ‘90s, or ‘70s, that actually technology is this huge headwind to inflation, and in fact, all the – I know we talk about this in our meetings, Kate.

    All the entrepreneurialism in the world is to take what we used to do and make it cheaper, and if that’s right and you look at all the new businesses that are… market… all do this thing, but I could do it cheaper. That is your big headwind on inflation, and I just think the traditional metrics and economics… the monetary base. Inflation has to follow. We grow wages. They have to follow. Listen, I don’t mean to understate it. I think buying TIPS makes some sense when you’re pricing five-year break-evens at 1.5% because we’re going to go over 2 – moderately over 2, and the Fed will allow that. But I’m just not that worried about it as the big-picture dynamic.

    Kate: I mean I think that last point you were making in terms of the Fed allowing inflation to run a little hotter than long-term target is so critical because one of the things we think about a lot as equity investors is what is the appropriate multiple for the level of inflation? And there’s kind of a sweet spot where inflation is rising modestly but not so difficult – so much that you end up getting a multiple contraction. But a lot of that sort of conventional wisdom or that historical experience was based on a Fed that was going to sort of manage more closely to an inflation target. Now if we know it can run hot a little bit, it reduces that fear I have of de-rating in the equity market as a result.

    And then there was – you made a really important point, Rick, around all of this entrepreneurship, all of this innovation really making goods and services more efficient and lower cost. And I think a big lesson that companies learned over the last decade has been managing their costs is critical to sustaining profitability through fluctuations in the economic cycle, and it’s dampened a little bit, as we’ve talked about before, economic volatility. In fact, the single largest contributor to higher profitability and higher net margins for corporates around the world but particularly for the US large-cap space has been lower cost of goods sold, input costs coming down, reducing or making more efficient your labor, and number one, sourcing – and number two, sourcing globally.

    I don’t think companies are going to take their eye off that ball in this environment and are really going to manage their costs, and therefore, we may not experience higher inflation as much as we might have in a previous cycle because of this laser-like focus they have. So I want to transition here a little bit to talk about income because this is key obviously for our portfolio and for many of the funds that you manage, Rick, and all of this great stuff that’s happening in terms of monetary policy in liquidity also doesn’t make government bonds particularly attractive. So maybe if you could talk a little bit about how you’re thinking about getting income into both a fixed income and a multi-asset portfolio at this point.

    Rick Rieder: It’s – I mean I – I mean that’s the most powerful question I get asked I mean every single day in meetings with clients, pension funds, insurance companies, and… etcetera. It’s all we talk about is how do we get income. I need income. I need income. And listen, like you say, the central banks are not going to move off this policy for at least a couple of years. I think they may move at some point if growth is what we think it will be, but I think the demand for income – we talked about that aging demographic, insurance companies, pension funds. It’s not going away any time soon, and the 60/40 blend that you see most endowment state funds, etcetera, run off of, the 40 being fixed income, what are you getting from the duration part? What are you getting from treasuries? What the Fed has tried to do is make the treasury market, even the agency mortgage market uninvestible so people find other things to do.

    And listen, I think you’ve got… more of a … today. You look at days like yesterday. The market is under pressure if treasuries don’t do anything but actually rise and yield, and I think you’ve got to think about the efficacy of the fixed income and the treasury portion of the portfolio. So how are we dealing with that? Listen, I think there – I think you can own credit in the portfolio. There’s been tremendous demand. It’s still really hard to get credit into the portfolio as others are seeking it out as we are, and I still like credit. I think defaults will be lower other than some industries. The faults will be lower than people think, and so we like owning credit.

    We like owning parts of emerging markets. We talked about it. There’s a… incredibly different dynamic. And then we like secured assets, things like the commercial mortgage space, again different because of COVID where you go, but also… and Kate, one thing I know better than anybody in the world, the equity market is a good place to get income today in a couple of different earnings, yield – dividend yield, free cash flow yield. When you put the discount rate at zero, the equity market holds a bunch of the cash flow tonight, and by the way, not only just organically, but you can… because volatility is high and get some income out of the equity market.

    So, I think you’ve got to be a bit different than historically… treasuries. I’m going to own a balance in the portfolio using duration. I think you’ve got to run more of a barbell. I think you’ve got to use more equities and more alternatives in the portfolio to get your income because you just can’t do it the way we’ve done it historically.

    Kate: Absolutely, and I think about the conversations we have with pension funds and institutional asset allocators, and they put in front of us either our own capital markets assumptions or whatever they do with their consultants and stuff and say this is a problem. And I think it’s not a problem if you can rethink the assets in your portfolio and employed… that you’re suggesting, which is use more alternatives, and use equities for income. I mean I think that if you’re doing your work on companies, you should feel comfortable with their balance sheets, with their free cash generation. Sure, you may get a little bit more volatility, but in the end, if you’re going to hit your return targets, there aren’t many other ways to do it.

    But I also want to talk a little bit more about emerging markets, which you have mentioned. We think a lot more about emerging markets as an income source both on the credit, but also, I would say on the equity side, some interesting dividend yield there. But we’re increasingly using emerging markets, especially like Chinese equities for example, as a diversifier in our portfolio because the correlation to other equity markets and to other asset classes is low. There’s been a lot of headline. I know Tom Donilon was on a little bit earlier today talking about some of the geopolitical risks, but does it worry you at all, and I hope the answer is no since we own… China, owning China in the portfolio?

    Rick Rieder: So the only thing that quite frankly worries me… externally and people question how much do you own in the region, but listen, at the end of the day, I mean some of the most exciting companies in the world are in China. The growth paradigm we talked about earlier in China is tremendous, and so I think, when you think about where the big power… and we – I think what drives commerce going forward as you do is at this technology. At the epicenter of technology is – I don’t know if it’s in Silicon Valley or in China, but it’s certainly – China has taken on a big portion of that. And so many of the most exciting companies in the world in China, so continue to invest there, and you have to be careful obviously about the geopolitical.

    I think there is that could evolve depending on how the election goes. I’d let Tom describe that better than I could, but boy, I – by the way, it’s not just China. There are parts of Asia as well that are the beneficiaries of that trade… with the new iPhone cycle that comes through and you see in places like Korea, like Taiwan, like Vietnam, etcetera. So, Asia broadly is a good place to invest.

    Kate: We’ve talked a lot about – and I heard Larry make these comments in his opening remarks as well, but it’s a huge theme for us, all of these trends that have kind of gotten super charged as a result of the pandemic. I was having dinner with some friends over the weekend who are brand consultants, and they said they felt on the consumer side, consumer behavior has accelerated 10 years in the course of nine months, and a lot of that, in terms of corporate spend on technology, feels like it’s accelerated multiple years in the course of nine months. So, I’d love for your thoughts. I mean you’re – you’ve been talking about this for years on your monthly calls, and it’s certainly in play in our portfolio, but talk a little bit about digital transformation and kind of the haves and the have-nots.

    Rick Rieder: How much time do we have? I mean this is my favorite subject, Kate. I think we’ve got a – I mean I think this is the most exciting time to be in investing, and I mean I think the things that are happening from data transmission, storage, cloud, AI, virtual commerce I mean is incredible. I think the efficiencies that are happening, and I think COVID spring-loaded some of these even further about the businesses that can grow and how you can actually create explosive growth because you can create scale through technology is incredible, and by the way not only create scale but that’s really different than some of the commodity-oriented economies years ago is you actually do it at positive cash flow because you don’t have to reinvest in infrastructure or logistics or people or etcetera. So, I think this is an incredible point in time. When people talk about technology and digital transformation, obviously talk about, including today, Google, Microsoft, Facebook, Amazon, etcetera.

    But actually I think those companies, while great companies, are the transport to new companies that are taking place, and I think they’re the platform similar like the, big telephone companies… years ago, that you’re seeing new businesses that are involved in. I mean… the Apple – the App Store. I think there’s 519 billion of commerce that goes through the App Store, 519 billion of commerce. I really want to tap into all of those companies that are flowing through the App Store that are going to be the next, I don’t know, Ubers, etcetera, that… create fantastic upsides. So, I’d just like – by the way, it’s not just in pure… companies like Walmart that are going more into digitalization of their business, companies like UPS, etcetera.

As tendências da tecnologia se aceleram

Tony Kim, diretor de Technology Investing for Fundamental Active Equities da BlackRock, entrevista Frederico Trajano, diretor executivo da Magazine Luiza, um dos líderes do varejo multicanal do Brasil, sobre o rápido crescimento de sua empresa e como o poder na área de tecnologia está mudando.

  • Tony Kim: Hello and welcome. For those who might not be familiar with Magazine Luiza or Magalu as they call it, Fred, can you give us a brief description of what Magalu does, how it began, how it became one of the leading technology companies in the Latin American region, in Brazil? And also tell us a little bit about your own personal story.

    Frederico Trajano: Hi Tony, pleasure being here with you, with the audience as well. So Magalu is one of the leading Omnichannel retailers in Brazil, so we are a 63-year-old company that now is currently a market leader in durable goods, sporting goods, and pharma e-commerce, 1P, first-party e-commerce in Brazil.

    I am the fourth leader of this company in 63 years. So, an unusual aspect of Magalu, Tony, is that the first two leaders of the company that ran this company for 50 years, they were women. So that’s quite unusual for Latin American standards. Luiza founded the company and now doesn’t work here anymore. Luiza Helena, another Luiza, is currently the chairwoman of the company, and currently, in Magalu we have 40,000 employees, 1,100 stores, 30 million clients, so it’s quite huge and relevant company for Brazil. I’ve been working here for 20 years. I started e-commerce here 20 years ago, one of the first to play the e-commerce game here in Brazil. We were one of the early movers here, always worked following the Omnichannel strategy for the company.

    I never separated the e-commerce from traditional retailer, and that’s currently part of our success. And I’ve been running the company for 5 years now.

    Tony Kim: That’s fantastic. That’s a great story. Fred, I mean I met you several years ago a little bit after the IPO, and I think for the audience I think it’s important to know that Magazine Luiza has been the single best-performing e-commerce stock in the world over the past three years. You’re up over 400%, which is 2X of Amazon, 4X over Alibaba, which is up 50%. And so maybe you could tell the audience what happened. And how did you achieve this? Because it’s a remarkable achievement.

    Frederico Trajano: So, Tony, that’s a good question because I don’t like quite often to talk about share prices and appreciation, but just to give you a straight answer here… so when I took over the CEO job five years ago, we were facing maybe the toughest economic crisis in Brazilian history, economic and confidence crisis. So, investors were not confident about Brazil, about the Brazilian stock markets. And back then, Magalu… incorrectly labeled as an electronic retailer, traditional electronic retailer. Back then we were already a highly successful e-commerce company, but we were not digitally native, so everybody thought we were an electronic retailer. And when you are in a crisis generally, there are two segments that investors don’t like. They don’t like airlines, and they don’t like electronic retailers.

    So, there was a sell-off back then It was quite cheap, undervalued. Then after that, more than 20 quarters, we posted extremely great results for 20 quarters in a row now, Tony. We are beating analysts’ consensus by far. We are growing three times as much as all other e-commerce companies in Brazil. We are generating tons of cash and making money, which is not common for e-commerce companies. So, when you are an underdog, you have the odds against you, and if an investor bets on you, it may win big.

    Tony Kim: Well, you’ve definitely delivered so far. So maybe if you could elaborate, you’ve evolved like you said in your history from a bricks-and-mortar kind of retailer, electronics retailer, and now you’re one of the largest e-commerce companies in Brazil. But you’re more than that. You transformed to a digital platform, and you’re aiming to be a Brazilian platform for a kind of digital native retailer ecosystem. What are the key strategic priorities now as the company is a lot different than what it was just a few years ago?

    Frederico Trajano: Okay, Tony. So, I think my first mission in Brazil in Magalu was to make Magalu digital. So, I think when you look at e-commerce everywhere else in the world you see that all the relevant e-commerce companies, they were born digital. They’re not like traditional retailers being successful in a digital transformation. Last quarter, eighty percent of our revenues came from e-commerce. We grew 50% over the last quarter even with the stores closed because of COVID and 80% comes from e-commerce.

    You see, we did the successful digital transformation in Magalu, and when we did it, when we accomplished that, Tony, I asked my team what’s next, what we should be doing now. We did it. We did something that – it looks easy as I’m talking right now, but you don’t see any other example in the world. Successful digital transformation, having more than 50% – 80% of the sales coming from (Inaudible) doing that profitability, that’s I think maybe – I don’t know any other company that did it successfully, a digital transformation. That was big, and when we did it, we wanted more. So, when you look at Brazil, you see five million retailers, and only 50,000 of them sell online. The majority of the retailers of Brazil, they are analog as we were.

    And having been successful in this digital transformation, we developed skills, knowledge, and codes, software apps, software that helped us in this digital transformation. What we want to do now is to turn ourselves into digital platforms. We want to be the operating system of Brazil retailing. We made Magalu digital. Now we want to make Brazil digital by providing those tools, that knowledge, those skills to other retailers in Brazil. We want to help as a platform, helping others to grow as we did. So, we opened our marketplace three years ago.

    Now more than 40,000 companies are selling online through Magalu’s digital chain. It was in using Magalu’s digital tools developed by Luiza labs, our 1,500-strong tech lab in Brazil. So, we want to share that knowledge, share that experience with other retailers using an ecosystem business model, a platform business model.

    You know, there’s so many things that Amazon accomplished in the US, that Alibaba accomplished in China, but they didn’t do a digital transformation. They were born digital. That is the knowledge that we have that is very rare that has a lot of value for other retailers as well. So, that’s why our ambition is to make Brazil digital, to be the operating system of Brazilian retailing, and to help other retailers should go digital as well.

    Tony Kim: That’s absolutely insightful to change and position a company in the next phase, to be that operating system, to be – to enable all the other analog retailers to join the digital transformation. And so how do you then view competition, and how do you manage your company against these competitors, especially given that you’ve been able to make that digital transformation? Is that something of note that you have an advantage over your competitors? How do you perceive the competition in the market right now?

    Frederico Trajano: I think competition in the analog world is like a FIFA 21 game. One team against another team, so it’s like a bilateral competition. When you are in digital, it’s more like Fortnight. So, you have 250 competitors at once. So, all retailers are doing marketplace. You see Google and Facebook launch e-commerce features in their platform, so, there are so many competitors that I cannot waste my team’s time and my time worrying about competitors. We should focus on our mission. Our mission is to make Brazil digital. We should be the operating system of Brazilian retailers, help analog customers to go digital.

    And we have a clear strategy for that. We have a lot of customer obsession. We want to have the fastest delivery in Brazil, provide that to third-party sellers as well. We want to have low interest rates. So, our focus is on consumers, on our mission, on our purpose and not on competitors.

    And that’s impossible to do in this digital landscape. The other point I want to make I think is relevant, Tony, is that when you are in a country like Brazil, I know many other countries in Latin America are like that, there’s a quote in Brazil that says that Brazil is not for beginners. It’s a tough market. Brazil is not for beginners, but it’s great for experts. So, if you are an expert, you have an advantage over for instance, international competitors that come to you and play in your field like (Inaudible) So, you have – you know your place, and you know where you are.

    So that’s something that we believe makes us more resilient towards big competitors like the ones that I just mentioned. So, for me it’s another point in our favor.

    Tony Kim: Okay, that’s great. different kind of question. Investors and BlackRock in particular are very focused and thinking about ESG. Is this something that you’re thinking about for the company? And what are some of the initiatives that Magalu is doing to address kind of ESG issues?

    Frederico Trajano: Tony, that’s a great question. I know BlackRock focused a lot on it. I know I have to answer many questions from your analysts about ESG. I think for Magalu it’s – we were born with an ESG focus, and when I talked about having the first two leaders being women, for 50 years they ran the company, they had a broader focus. They had focus on employees, on – and they do deliver profits, but they had a bigger and broader set of goals. Having had two female CEOs as our first two leaders was a big part of ESG.

    Currently, if you look at a public-traded company in Brazil, we have the highest share of women in the board, close to 50%, the highest against all other companies like Magalu, and we are doing a lot of things in that sense.

    For instance, we’ve been the best company to work for in Brazil for 20 years, one of the best companies to work for in Brazil, the top 10 for 20 years, the best retailers, the best e-commerce company to work for. So that’s very consistent in this pandemic, we had a public announcement of not firing anybody. We even hired 3,000 people because e-commerce was so strong that we had to hire, so that public statement made a huge impact among other Brazilian companies and retailers in Brazil that had their stores closed.

    Something that we don’t talk about that much is to help business to get digital. I think that is pure ESG. So, in the pandemic, there were so many retailers that closed their business. We have – we developed what we call IBDV, which was a system to help purely analog retailers to sell online. And you remember they had their stores closed in the COVID crisis here in Brazil. So, the only way they could sell was through our technology, so we helped them sell. We also have 200 of our stores being supplied by solar energy.

    Tony Kim: That’s an impressive – that’s a very comprehensive list of initiatives, obviously as a company founded by women and you’re spearheading a lot of these ESG initiatives it appears in Brazil. Maybe – given our audience today, obviously, thousands of our clients are based in the region, in the Latin American region, not just Brazil. Maybe we can talk a little bit broader about the entire landscape in Latin America. How do you see the future impact for the region? Can Latin America become a technology leader in the coming decade? What are your thoughts here?

    Frederico Trajano: So, I think yes, it should, and it can. When you look at Latin America, I’m more specialized in e-commerce than tech as a whole industry, and even more in Brazil, but I can talk about Brazil and I think it’s pretty much the same for other countries here. So pre-COVID, only 5% of Brazilian retail comes from e-commerce. COVID made it 10%, but it’s still very low if you compare to US and China. So, there’s lots of room to grow in these early days.

    I’ve been working for 20 years but still just in the beginning scratching the surface here, so there’s so much more to do. I do feel quite strongly that US nor China – they don’t have monopoly on innovation. So LatAm leaders, they can lead the digitization of their countries, of their companies.

    We are doing that in Brazil. We are doing that successfully. We are making an impact here for Brazilian companies, for the stock market as well. So, I think if we can – if we are doing that, why can’t other companies do that, following the same path? So, we have – at least here in Magalu I’ve been able to hire very, very talented professionals. I told you 1,500-strong software engineers, great people that are doing great apps for great businesses in Brazil. I think we can do it. I strongly believe that, and I think we should avoid the trap of thinking that innovation will only come from developed countries, especially China and the US.

    Tony Kim: That’s fantastic. Okay, in the last few minutes here, I want you to tell the audience a little bit about – more about yourself, so we’re going to do a little rapid fire. Five questions, quick answers, so we can get a little sense of who you are. All right, question one, as you grew up, who or what has been the biggest influences in your life?

    Frederico Trajano: That’s an easy one: The two Luzias, my aunt and my mom the chairwoman of the company

    Tony Kim: great answer. All right, two, what or who inspires you right now, today?

    Frederico Trajano: I’m very inspired about Chinese leaders. CEOs like Jack Ma, Pony Ma, so I’m very inspired about Chinese companies and their leaders.

    Tony Kim: Okay, the internet giants of China. All right, three, are there any technologies that you’re most interested in right now or that really captivate you?

    Frederico Trajano: I am very, very focused on geolocation, Tony. So, we think that’s very important for a country with logistics challenge and we have dozens of people focused on

    that currently.

    Tony Kim: Know where your customers are. That makes sense. Do you have any book suggestions, anything that you’re reading or something that you like?

    Frederico Trajano: I think the most relevant business book I’ve read, it’s Platform Revolution from (Inaudible). That is a Brazilian writer, a genius (Inaudible) very good Brazilian book, small but very good. And there is (Inaudible) that is like – it’s now currently living in Germany His book is The Burnout Society great book

    Tony Kim: All right, I’ll have to read that in English. Last one, last one, all right, a little entertainment. Any favorite movie or genre of movie that you like to watch?

    Frederico Trajano: a traditional one that I love, a classic, it’s Blade Runner (cut missed)

    Tony Kim: Blade Runner, love it, love it.

    Frederico Trajano: Ex Machina would be the best AI movie that I’ve seen – I’ve watched…

    Tony Kim: That’s a good movie too. I’ve seen that. It’s fantastic. Okay, I think that’s it, Fred. I mean it’s been an absolute pleasure, great to see you again.

    Frederico Trajano: Thank you Tony, nice seeing you. Thank you, guys.

    Tony Kim: Thank you. Bye-bye.

A tecnologia e o futuro dos investimentos

Yitzi Stern, diretor do Aladdin Business da BlackRock América Latina, e Sudhir Nair, líder global do Aladdin Business, conversam sobre a visão da BlackRock quanto à tecnologia e oferecem suas perspectivas sobre o papel da tecnologia no empoderamento do investimento.

  •  

    Yitzi Stern: Hi. My name is Yitzi Stern. I'm the Head of the BlackRock Solutions business for Latin America. Here with me is Sudhir Nair, the Global Head of the Aladdin business. Sudhir, thank you for joining us here at the Latin America Virtual Forum. I would like to start by asking you to discuss your background and your role within the BlackRock organization.

    Sudhir Nair: Thanks, Yitzi. It’s obviously very exciting to be here. I began my career at BlackRock just over 20 years ago. I actually started as an analyst within our BlackRock Solutions unit, working on what was then our first client of Aladdin, the technology that we use both internally at BlackRock and across many, many other third-party organizations. So, I’ve had the benefit of spending the past 20 years being deeply embedded within how BlackRock thinks about technology, and working with so many organizations around the world. And for the past six years, I’ve been globally responsible for what we call the Aladdin business.

    Yitzi Stern: Thank you. I wanted to know if you can spend a few minutes talking about how BlackRock views technology.

    Sudhir Nair: Absolutely. Since its founding over 30 years ago, BlackRock has always believed that asset management is fundamentally an information processing business, and that, as an asset manager, we are truly a technology company. So it’s no surprise that technology and the mindset around wanting to have access to great technology is deeply embedded into almost every corner of our organization and in many ways, has allowed us to grow and scale over time.

    But technology means different things to different people at BlackRock, and it’s everything from, at its core, our operating platform. I mentioned a few moments ago Aladdin. For us, all components of BlackRock, be it our investment process, our distribution process, or our operations, all run on a common platform that we call Aladdin, which gives us an ability to have every one of our employees located around the world using a common set of data, a common set of processes, and a common way of thinking about client portfolios and outcomes.

    In addition to being an operating system, Aladdin is really a mindset and a way of life. We often use the term Aladdinizing and I think that’s indicative of how BlackRock has always viewed the business process as something that can be made better by thinking about how to use technology. So, you’ll often hear in the hallways of the firm conversations around how to make something better with technology, how to improve a process, how to more effectively use data, because that is so engrained into everything that we do.

    And then lastly, and of course, near and dear to my heart, technology at BlackRock is a third-party business and an important business into how the firm overall works with clients. Today, we have hundreds of clients located in close to 70 countries around the world that represent every facet and aspect of financial services: asset managers like BlackRock, insurance companies, asset owners, official institutions, alternative asset managers (through our acquisition of eFront). It really spans the spectrum of financial services. And with each and every one of these relationships, we have tried to create what we call a community around like-minded organizations sharing in a passion for technology, all committed to having their businesses operate more smoothly and making the technology better.

    Yitzi Stern: Thank you. You know, given the passion that you were talking about and the overall evolution of technology at BlackRock, specifically, when we focus on the client-driven business, can you describe a little bit about the BlackRock Solutions business in Latin America: the footprint and also, what are some of the lessons learned while building the business down there?

    Sudhir Nair: Well, Yitzi, I feel like I should be asking you to answer this question given the important role you’ve played in how we’ve thought about our business and expanding our technology for our clients in Latin America. It’s really been an incredible journey. As recently as five years ago, we had zero clients in Latin America and today, that has grown to just under about 14 clients that are using the breadth of the Aladdin toolset, and these clients, similar to what I just described, represent many different segments of the financial services ecosystem across the region. They represent Afores, AFPs, fellow asset managers, insurance companies, banks, and family offices, and they’re located around the region, including Mexico, where we started our local expansion, Chile, Colombia, Panama, and most recently – we’re quite proud of this – we recently completed our first implementation in Brazil.

    In terms of what we’ve learned, there have been many lessons learned. But at the same time, we’ve learned a couple of core things that I think have allowed us to really provide value in the region and establish great partnerships with clients. First is that you need to be local and while there are so many similarities in terms of how investments are managed, how portfolios are built, how fiduciary relationships are run - between organizations that are domiciled in Latin America and organizations that are domiciled elsewhere in the world, there were also many, many differences. And it’s important to have that local flavor and that local presence in making sure that when we think about our investment and our team, that we have teams of people located physically alongside of our clients.

    Now, obviously, everything that’s happening with the pandemic has sort of changed that paradigm a bit, but the concept is still the same, in terms of understanding the local market and being able to empathize with the user of technology, is a really big component with regards to being successful in the new market. Alongside that, the key is really listening and understanding the importance of the local regulatory regime. What we’ve found is that by really being attuned to how clients are thinking about their relationship with their regulators, and ultimately, how money is managed, it has allowed us to use the core capabilities of our technology, rooted in strong business process and great risk management, to provide value to clients and to more rapidly localize our capabilities to be much more relevant to the times.

    And the third major learning is, again, along that theme of localization. It’s all about making sure that you’re doing the hard work to have your system and your technology truly address the nuances of the local market. On one end of the spectrum, I think by working with organizations in Latin America, we’ve brought many new concepts and in some ways, are modernizing the way financial services work. On the other end of the spectrum, we need to be very sensitive to the fact that securities have different behaviors. They have different accrued interest. They trade differently. They price differently. And in order for the technology to truly work, to truly add value, and to really be used as the primary platform to manage money, we’ve needed to make […] many functional enhancements and learn, as much as we are helping our clients learn, about the way that local business is run.

    Yitzi Stern: You know, Sudhir, you mentioned a little bit earlier about the COVID-19 or the pandemic. And clearly, by us having this Forum in a virtual sense, both operating from our home offices, can you maybe describe a little bit how the role of technology has changed at BlackRock given the pandemic?

    Sudhir Nair: Well, it’s funny. I think every single person that I’ve met, whether you work at BlackRock or one of our clients, has a newfound appreciation for the importance of technology, given what’s happening in the world. It has truly become the binding agent that is keeping us all together, both in our personal lives and certainly, in our professional lives and how our businesses are run.

    At BlackRock, as I mentioned, with a single operating backbone, we’ve found that the way that we’ve thought about technology has been a tremendous asset with regards to how we've been able to migrate the way BlackRock’s business operates: from having centralized offices with people physically working within them to almost having 16,000 - that’s the number of employees we have - 16,000 individual home offices. Now that could be an incredibly daunting task for any firm, and certainly, we know of many organizations who have encountered this challenge with different various degrees of success. But, I would tell you that we’ve found that by having a tech first mindset and being focused on using technology as a way of bringing employees together and closer to our clients, it’s allowed us to quickly and effectively transition to the new way of working, while at the same time, maintaining connectivity across our employees.

    Another impact, and I think we all saw this in the early days of the pandemic and the crisis, was with the market volatility portfolio activity went up exponentially, and that put tremendous operational pressure on the financial services ecosystem. In many ways, it was a stress test of what people can do and how certain business processes can hold up. But, we found that, again, technology has done well and provided incredible operational resilience, everything from our internet bandwidth, that everyone has now sort of pushed to the limit between their professional lives and their personal lives, to all the things associated with our investment process.

    We saw spikes in trading activity during the month of March, which were far in excess of our previous highs. It was really encouraging and great to see how our processes and our technology were able to allow all of our employees to operate as effectively as ever, through such incredible times. And I’ve heard, you know, thinking beyond BlackRock for […] many of our Aladdin clients that they view having centralized, unified, consistent technology that they can operate around the world as a key benefit and a key differentiator and one of the primary reasons that they were able to successfully migrate during the initial stages of the pandemic, as people were beginning to work from home.

    So, to summarize a bit more succinctly, if anything I think the importance of technology has gotten even greater as a result of what’s happening in the world, and we’re finding so many organizations using and thinking about ways to change their business model to prepare for the new way of working, leveraging technology even more.

    Yitzi Stern: Now, shifting gears a little bit, more focused on just the asset management industry in general, what are some of the technology trends you see changing and affecting and impacting the asset management industry?

    Sudhir Nair: There’s a lot and without a doubt, our industry is going through some pretty significant change and to a large degree, a lot of these changes are being driven by trends that are not new, that have actually been in flight for many years, that are almost secular in nature, and they are centered on a variety of different things. One is - and I think this is probably the biggest trend - is just around the role of the investment manager relative to their clients, where increasingly we believe clients are looking for investment outcomes. They’re less looking for specific products. They’re really looking to have great portfolios and work with their investment advisors to build great risk adjusted portfolios that are meant and intended to deliver specific investment outcomes. And while that may seem like a very basic concept, it’s actually creating quite a stir with regards to the underlying technology that’s used to manage money.

    From our perspective, we’ve always viewed the business problem, as I mentioned earlier, as information processing, and that’s always led us to having a strong view of risk management and having an ability to understand the portfolio. But as the definition of portfolios becomes, in many ways, more complicated, and as the product boundaries between fixed income, equities, alternatives, currencies, derivatives begins to blur more and more and more, it’s putting incredible stress on the underlying business processes and technology that people use to build these portfolios at scale.

    We see this big push towards what we call whole portfolio solutions, meaning the ability to really manage multi-asset at scale, inclusive of the blending of both public and private assets. I think one of the primary trends affecting our industry is the overall […] returns and rate environment putting incredible pressure on organizations that are looking to manage against a liability profile. It’s just harder to generate returns. And as a result, we see more and more and larger and larger portfolio allocations moving into private placements, private equity, real estate, infrastructure - asset classes that traditionally had allocated, you know, somewhere between 2% and 5% to the portfolio, now playing a much more meaningful role. And what that means from a technology perspective is the lines - these traditional lines between public and private, where much of the private market portfolio process is done on spreadsheets and through manual processes and paper - that’s no longer going to work.

    So, we see so many organizations, and BlackRock is really trying to lead the charge here, thinking through what is the technology infrastructure that is required to service clients and build portfolios for the next ten years, recognizing that we're moving to a whole portfolio world and that involves looking at portfolios through a variety of different lenses. So, I think that is one of the primary drivers of change and one of the biggest trends that we’re seeing.

    In other areas, I would say that the role of data, you know, we’re data geeks, and we’ve always had an incredible appreciation of data and how important it is to be able to use data effectively, as you’re thinking about investments and insights and generating alpha. But obviously, over the past several years, there has been an incredible proliferation of data, both in quantum, but in terms of new types and accessibility. And in many ways there is an arms race, for lack of a better way of describing it, across a whole host of investment organizations - trying to get access to data, trying to build the right infrastructure to use data, trying to hire the right talent to appropriately mine and gain insights from data. But clearly, the combination of big data, […] artificial intelligence, and machine learning, and just access to incredible amounts of compute at a relatively low cost through […] technology innovations like cloud has created a whole new investment process around thinking through how to generate investment insights. And most organizations do not have the appropriate technology infrastructure and talent to properly capture that. So, we see a lot of organizations looking to partner with other firms who are able to give them scale where they traditionally do not.

    And then, the final trend that I would probably talk about – there are so many – is just what we call the consumerization of enterprise technology. […] For many years, […] the technology that we use at work has always had a certain standard, and over the past few years, we’ve seen a pretty significant divergence between how we think about technology at work relative to how we think about the personal technology that we use each and every day on our phone. And to some degree, and as someone who works and lives in enterprise technology, I would be the first to admit that consumer technology has always been on the bleeding edge in terms of convenience, elegance, simplicity and on the enterprise side it has been functionally rich but overall, much more complex.

    We see this incredible convergence of these two worlds - that is accelerating quite a bit - where enterprise technology is becoming much simpler, where the expectation around convenience is growing much higher, and the expectation and achievement around interoperability and connectivity is becoming much more real. So, what do I mean by that?

    I mean that the days of having many, many, many systems all talking to each other through […] different proprietary links and databases and spreadsheets […] are quickly going away. It will take time. But there is a realization that there is a simpler way of doing things that is more modern, that is more interoperable, and that is more just functionally end-to-end.

    Yitzi Stern: Wow. With all of these trends it seems like it’s quite a challenge in terms of managing […] this type of structure. So, you mentioned a few things. You talked about complexity. You talked about scale. You talked about having additional stress on the system, on the platform, the world going multi-asset, and of course, the focus on big data. So, given all of that, what – how are these trends shaping BlackRock’s own tech strategy as they move forward in the future?

    Sudhir Nair: It’s a great question and, […] we’ve always tried to inform our tech strategy first and foremost by paying attention to what’s happening in the world around us and, of course, by listening to and talking to our clients. And everything that I just described I think is core to our multiyear tech strategy.

    Earlier, at the end of last year, we embarked on something that is really BlackRock’s technology strategy for the next five years. We call it Tech 2025. It’s focused on five pillars that guide how we think about evolving our technology over the next five years. And it’s really informed by everything that I just described: concepts like building great technology to manage a whole portfolio, beyond public and private assets. It includes things like […] having an end-to-end workflow that goes from front to middle to back, inclusive of […] investment accounting and how it flows back to risk. It involves being able to look at portfolios through a variety of different lenses, including increasingly important lenses like sustainability, ESG, and climate, recognizing that the way people build portfolios is changing quite significantly, and what were concepts that were somewhat on the fringe several years ago are quickly becoming core to how people think about building portfolios. And as a technology provider, and someone who runs their business on technology, it’s important that we have that properly thought through and integrated into the end-to-end investment process.

    We believe that, you know, the strategy is one that can’t be exclusive and contained with any single organization, but really the biggest impact is going to come from how we extend it beyond our walls. So, increasingly, we’ve been seeing financial services moving much more to a platform strategy, where this concept of coopetition, where different ecosystem providers ae providing different components of the value chain and success is really all about getting to that point of interoperability and connectivity. We view ourselves as a provider of this technology, and as a platform provider, as someone who has an ability to really do a great job of stitching it all together.

    The more we can make the end-to-end workflow seamless, convenient, and efficient, the more that we can focus on user workflows and making people’s lives easier - the more streamlined financial services will be, the higher quality data will be, and the more effective investment managers and fiduciaries will be at managing their client relationships. That is really how we’ve been thinking about the strategy. Obviously, the whole thing is powered by data, and it’s why BlackRock has tried from its earliest days, but certainly, no different today, by having an environment where we really have an ability to lead the industry in using data.

    About a year-plus ago, we created something that we call the AI lab. It’s really a group within BlackRock that is focused on looking at the investment process, including alpha generation, but also operational processes, and thinking through ways to use big data, data science, machine learning, artificial intelligence to solve some of the problems that we’ve traditionally worked through through a very different manner and mechanism. I would tell you that some of the output that comes out of the AI lab is absolutely fascinating and you can just tell as we adopt it more and more, and clients do something similar, we will see the underlying infrastructure of financial services evolve quite rapidly in the years to come.

    Yitzi Stern: Absolutely. That's one of the drivers even when it comes to private assets and being able to load data that is typically buried in emails and in PDF files to be able to […] onboard that information in a consistent manner. So, Sudhir, you mentioned a little bit earlier about sustainability, and given that it’s really a big focus at BlackRock, especially when considering Larry Fink’s letter at the beginning of the year, how does this play into BlackRock’s overall data and technology strategy?

    Sudhir Nair: It’s great that you flagged it, because it’s obviously a critical component to BlackRock’s overall data and technology strategy. Sustainability as a concept is so important at BlackRock and so increasingly important with almost every organization that we work with, all of our clients. We need to make sure that we are thinking through the best way to take what is today a quite fragmented data landscape as it relates to ESG, sustainability, and climate, and bring that together into a cohesive model that clients can ultimately use to think about their investment process.

    You know, I see the future of how folks think about sustainability much less as a metric on a page, but much more completely engrained into the entire end-to-end investment workflow. So, as we think about building technology, as we talk to organizations about how they’re thinking about it, we’re learning a lot about what it means to bring together these different datasets to strike the right partnerships, and how to ultimately synthesize them so people can develop investment insights, but really understand their exposure as it exists today.

    I think probably the best example I could give you is specific to climate risk. […] We passionately feel that climate risk is investment risk, and it’s very important for investors in the years to come to really understand and be able to quantify the climate exposure they have within their portfolios. So, we’ve been working for the past year on building new technologies to help investors do just that.

    Earlier this year, we struck a partnership with a group called Rhodium, which has brought us a wealth of climate science analytics that we’re now in the process of marrying with our portfolio and portfolio analytics, the goal being the same way that a portfolio manager would be able to look at his or her interest rate exposure across a given portfolio, across asset classes - they should be able to do the same, but by measuring different potential outcomes associated with temperature change or floods or hurricanes or fires and the like.

    It’s newer science. These are newer concepts. But you can certainly see the amount of demand that’s coming, both from the investment teams at BlackRock, but also our Aladdin clients, to be able to really understand and quantify this impact.

    Yitzi Stern: That's fascinating. You also mentioned a little bit earlier about AI, artificial intelligence. And sometimes, when I think about it, you know, you go to those futuristic science fiction movies. But what role do you believe AI will play in the future of investment technology?

    Sudhir Nair: I think it’s going to become increasingly important, and I just see so much of what we do is about looking at data and trying to convene insights from data. I think most people quickly jump to using these, you know, new computing techniques to […] scanning parking lots and using it to generate investment alpha. And I think those use cases are true and real, and they’re evolving every day. But I actually think there’s an ability to use AI and data science throughout the way investment organizations run - whether it be […] through our operational processes.

    As you can imagine, […] we deal with hundreds of millions, if not billions, of pieces of data each and every year across our various portfolios and our investment processes. A lot of what we’re doing is looking at that data, comparing it to other data, looking for exceptions, doing reconciliations - everything that every asset manager is responsible for doing from a good governance and fiduciary perspective. But by using some of these new computing techniques, you’re able to do all sorts of new things with that data and understand different ways to much more proactively manage and quality control that data. What we’ve found is that the combination of human plus machine results in a much higher quality dataset in a much more efficient manner than either one doing them individually.

    So, it’s still relatively early days. But the results have been quite promising, and I do believe that as more and more organizations build their own skill sets and teams around using some of these new technologies, that the impacts to the industry will accelerate in the years to come.

    Yitzi Stern: That's amazing. I mean there’s truly so many moving parts and all of this coming together. And as we sort of pave the path forward for the future it sounds very, very fascinating. Sudhir, I wanted to thank you very much for your time and for your enlightening responses - thank you.

    Sudhir Nair: Yitzi, it was a pleasure and thank you so much for the opportunity. I had a great time.

ETFs: impulsionando a inovação nos portfólios (ETFs na América Latina)

Armando Senra, diretor de iShares Americas, e Nicolas Gomez, diretor de iShares e Product Development para a América Latina, analisam as últimas tendências dos ETFs, desde as táticas utilizadas pelos investidores e instituições até as estratégias de portfólios sustentáveis.

  • Nicolas Gomez: Armando, it’s great to have you at the conference, and aside from it being virtual this year, a conference that you know very well and you’re very familiar, as well as our clients.

    Running the American iShares business, you have a broad view of how different clients around the world are using ETFs, and as you know, ETF adoption in the region is high, and I would say that ETFs are the instruments of choice of Latin American investors to invest internationally.

    About 30% of international portfolios in the region are built with ETFs, and I think it’s fair to say that this forum has a good understanding of the ETF industry, and some of the main drivers that are taking this industry to almost $7 trillion in size and growing at about a 15% organic growth.

    As we all know, a lot of things have happened this year when it comes to ETFs, also a very interesting year. ETFs trading volumes in the exchange have upped 40% during points during the month of March, and also, an incredible growth in assets, and a very interesting year for a lot of new users of ETFs.

    I’m going to start with a general question, Armando. What are the main key trends that you have seen this year in the ETF industry in the US and around the world?

    Armando Senra: Thank you, Nico. And let me just first say that I'm very happy to be part of this event again. It’s always one of my favorite events during the year. So, at least I'm glad that we can connect with our friends and clients across the region virtually this year. I hope we get to do it in person again next year.

    So, to your question, let me just talk about what I think are three global trends that are also panning out in LatAm and then we can go a little bit deeper as to how they’re playing out in LatAm. Number one is the growth of fixed income ETFs, both across institutional and wealth clients and across the world as replacements of individual bonds in portfolios. Number two is sustainable. Sustainable year-to-date represents about 20% of our flows, of our total flows in the US and, of course, tremendous growth globally, so another trend to discuss. And the last one that I want to talk about is kind of like the growth that we have seen in fee-based and also how it has led to the growth of model portfolios.

    So, let me just touch on these ones, on these three topics for a couple of seconds, a couple of minutes. In the case of fixed income ETFs, institutional clients have been using ETFs for a long time, especially in LatAm; nothing new there. Central banks, asset managers, pensions, endowments, foundations, insurance companies, broker dealers are all using ETFs. Different uses across the different client segments, but they’re all big users of ETFs.

    In 2020 we saw tremendous acceleration in the adoption of fixed income ETFs as a replacement of individual bonds. Especially when you think about the markets of early in the year, it really validated the utility of fixed income ETFs once again. So, I wouldn't call it that it was the final test. I would say it was like one more validation of the utility that the product provides to clients around the world.

    When you think about February and March, the liquidity of the bond market was significantly impaired. Institutional clients were just not able to move bonds in size without incurring significant transaction costs. Risk appetite from the Street was dramatically reduced, because the uncertainty and high volatility, and that drove transaction cost and bid ask spreads higher.

    So, that was a time, for instance, here in the US when investors needed to rebalance or needed to access liquidity and the cost of rebalancing was incredibly high and there was a lack of liquidity. So, just as an example, when you think of a typical investment grade bond and you try to liquidate that, the cost of liquidating was around 49 basis points. And when it came to liquidating high yield bonds, that was about 100 basis points. And the lack of liquidity, that affected the bond market significantly, but it didn't have an impact on fixed income ETFs where actually markets saw significant liquidity flow into them.

    So, clients who owned fixed income ETFs were able to tap into the liquidity of this market and this strong liquidity of the fixed income ETF market also kept transaction costs and bid ask spreads low compared to the underlying bond market. And for that reason, we saw over, in the last few months, we saw over 60 first time buyers of fixed income ETFs in the institutional segment, including large pensions, foundations, and interestingly enough some of the largest active asset managers in the world, many of them big competitors of ours, of BlackRock, utilizing iShares fixed income ETFs in their portfolios to replace individual bonds, because of the liquidity, transparency, and simplicity, the reduction of complexity, that fixed income ETFs offer in portfolios.

    The second trend that I discussed was sustainable and I think a big inflection point was a better understanding that investing in sustainable is not about values. It’s about ESG-related risks and the impact that ESG concentrations have to asset pricing and, therefore, in portfolio returns. So, I think that that departure from values to value, to really think instead of values thinking about investment risk in portfolios, that really propelled the growth of ESG investing around the world

    But I think that something very significant that we saw in 2020 was much faster adoption that even we expected in the US. We always saw tremendous growth in Europe, but actually in total flows the US has surpassed Europe in 2020. And if you just look in absolute numbers just as a reference point, last year in our ETF franchise we saw about 4 billion dollars of inflows in the US. This year, we’re going to end up the year around $20 billion in inflows and that’s just the very beginning of what we think is a tremendous area of growth and interest from clients where now ESG is part of every client conversation, whether it’s institutional clients or wealth clients.

    And let me just touch briefly on the last point and I know that you’re going to want to go deeper into that, which is the growth in fee based. And there’s different elements that drove the growth of fee based in the US and around the world. Regulation, risk concerns at banks, advisors’ desire to increase the value of their practice and ultimately fee based also led to a significant growth area in model portfolios, models run by us and other players like BlackRock, models run by banks and private banks, and ultimately the biggest part of the market is models run by advisors themselves in a systematic way. So, let me just stop there and then we can dive into more details as to how these trends have impacted LatAm.

    Nicolas Gomez: Let’s talk about fixed income ETFs. What are you seeing in the region in this context of fixed income ETF adoption? What are you seeing in Latin America?

    Armando Senra: Yes. As you said when we started, LatAm investors have been big users of ETFs for a long time, particularly the institutional segment where our business in Latin America started. As with the rest of the world, we saw rapid adoption and more users with different uses for the vehicle. We saw, for instance, central banks gaining exposure to mortgage-backed securities through ETFs as opposed to individual bonds. We saw asset managers, pensions, and family office using credit ETFs and emerging market bond ETFs to replace some of the Latin American corporate bonds that they had in the portfolio.

    Just as we talked before, in the early days of this year when we saw the volatility in the market and what was happening at that moment in time, Latin American investors, they were experiencing problems with the liquidity of their LatAm corporate bonds and they switched that to fixed income ETFs as a way to have the liquidity, transparency, and frankly less complexity in their portfolios and more efficiency. The other thing that we have seen in Latin America has been the replacement, not only of individual securities, which is the main trend that we see around the world, the replacement of individual bonds for fixed income ETFs as a better building block for portfolios. In Latin America we saw also the replacement of legacy mutual fund exposures for fixed income ETFs.

    So, when you think about investors in Latin America were invested in high yield and investment grade and emerging markets, many times through mutual funds. And they are beginning to replace that, and we saw that at the beginning of the year with the volatility, a big switch from mutual funds to fixed income ETFs. Frankly, just a better wrapper for institutional investors where it brings not only the simplicity and the liquidity that I mentioned, but even from the perspective of rebalancing the ability that you have in an ETF to trade intraday and to understand the pricing of the securities that you hold in the ETF intraday as opposed to having to wait until the end of the day with mutual funds. That, that’s a great utility for institutional investors and that has accelerated the move to and the growth of fixed income ETFs in the region.

    Nicolas Gomez: When you think of the investors that have been using different instruments, in particular, mutual funds for a long time, and they see, in the middle of this crisis, our high yield ETF, the high yield iShares, that, at different points during the month of March, was about 50% of the whole total volume of the high yield market, and that includes high yield bonds and high yield ETFs to not really look at this ETF as an instrument to be used, to be approved, to incorporate into the portfolios, it’s hard to justify, so definitely, definitely very interesting adoption of fixed income ETFs that has been accelerated this year.

    Now, on ESG, so, you know, we’ve been talking for some years about ESG adoption in Europe, and you mentioned, this has been a fantastic year in terms of ESG adoption in the US where about 20% of all the iShares flows into our US platform has been ESG ETFs. Where do you see us? Where do you see Latin America on this topic, on ESG adoption?

     

    Armando Senra: As I mentioned at the beginning, the key driver for faster adoption of ESG is the understanding that this is an investment risk decision. It’s not a values decision. That really opened up the conversation and created a very significant driver for growth and interest in ESG investing

    And with that in mind, the reality is that most clients are just beginning to integrate ESG considerations into their portfolio construction process. So, we are in the early days around the world. In 2019, we saw an inflection point, tremendous growth in 2020. In Latin America we’re seeing the same thing. We are in the early days, but we are seeing a lot of really interesting things happening in the region.

    We just launched the ESG Mexico ETF working closely with pension funds. That is incredibly excited – exciting in the market. There is also the launch across the region of multiple ESG mutual funds that utilize our ETFs as the essential building block of those portfolios. So, we see a lot of activity across the region. We are in the early days. The conversation is just beginning. But ultimately just the same trend in growth that we saw across the world we expect in Latin America.

    Nicolas Gomez: Definitely, definitely, and I will definitely say that this is an area where we really expect to work a lot hand in hand with clients in the region, and I’m looking forward to engaging on this conversation and helping clients understand where ESG fits into the portfolios and how you can transition portfolios into a more ESG focus.

    Armando, we haven’t talked about equities that much, but in Latin America, for example, equities and the use of ETFs for equity exposure is very big. Investors have been using a lot of our single country ETFs to express their equity views in a world with COVID, a world with a lot of dispersion of returns among countries, and this has a lot to do with how differing countries have confronted the pandemic, whether it is from a fiscal point of view, from an economic point of view, from a healthcare perspective.

    And, for example, if you look at returns and this dispersion, this is the middle of March, you’ve seen returns, for example, of Germany, 58%, in China, 44%, Mexico at 8%. Now, going back to the US and to the global trends that you’re seeing, what will you highlight in the world of equity ETFs.

    Armando Senra: Yeah. That's an interesting question. I would say that Latin American investors are at the forefront of using our single country franchise as building blocks for actively managing international portfolios. And that’s very distinct of what we are seeing in LatAm compared to other places around the world, including here in the US where it’s a lot more access in international markets through broad exposure.

    I'm not surprised about that, because ultimately what you can do through the country-specific funds is take into consideration, for instance, the response to COVID and how some economies are coming out of it in better shape than others. So, that makes a lot of sense for Latin American clients to be executing active portfolios through the country funds.

    As for the US, I would say that the main considerations in investors’ minds right now are higher inflation and weaker dollar. So, I know your question is about equities, but ultimately higher inflation has been priced into the fixed income market since March and if you look at flows at that point in time, we saw the strongest growth in flows in July and August going to TIPS ETFs, inflation protected ETFs, as that consideration began to be of more concern to investors.

    From an equity perspective, we have seen investors positioning for higher inflation using commodity linked equities. And since February, we saw some of the strongest performance in growth coming into our commodity lineup.

    Beyond that, then you have the consideration of a weaker dollar and the implications that that has, especially when in the US both institutional and wealth investors after the risk off moment of the beginning of the year became heavily underinvested in international equities. So, we are beginning to see that trend changing. We’re beginning to see flows again into broad exposures, primarily developed markets, but also it is becoming clear that that trend will change, and we’ll move to begin to build our positions in emerging markets as well. Especially as you see commodities strengthen, there’s always been a tight correlation between the strength in commodities and the performance of emerging markets. So, watch that space but we’re beginning to see US equity investors move back into international and also beginning to look at the emerging markets investments.

    Nicolas Gomez: Let’s shift gears a little bit, Armando, and talk a little bit more about the wealth industry. You talked a little bit about the continuation of ETF adoption in wealth, and in particular, as it relates to models. In LatAm, in Latin America, and in particular in the offshore channel, the offshore money that is managed out of the US, we continue to see this fee-based adoption. Currently, at about 15% of assets and growing, but way below the 50% in the US. So, I guess my question is twofold. Has this year, the dynamics that we’ve seen this year, helped grow fee-based adoption? Or what’s really happening and what’s been the role of models? What’s really happening in wealth? And whether you see this trend in Latin America, 15% who have a lot more room to grow.

    Armando Senra: That's right, Nico. Let me talk about both the growth in fee based and also the growth of model portfolios. And like I said at the beginning, different elements drove the growth of fee based, both here in the US and in Europe everyone is aware of MiFID II and that fueled the growth of fee based. But it’s also happening in Latin America.

    And ultimately, the growth of fee based also led to the growth of model portfolios. And I think that when you look at it there’s some common elements how the move to fee based and model portfolios help reduce conflicts of interest. It helps better align clients to the risk profile and reducing dispersion among clients in the same profile. A consideration that is sometimes ignored is how do advisors benefit from the value created by their practice. And I think that the move to fee based really helps create a stronger value in an advisor’s practice compared to a transaction-based practice where every year the clock resets to zero.

    So, if you’re an advisor, the move to fee based helps you create stronger loyalty with your clients. It helps you have more steady growth in your business. And the growth of model portfolios helps you focus on what matters the most, finding new clients and helping serve your clients better. So, if you think about it, the move to fee based and then it comes with the growth of model portfolios, which really helps scale the advisor’s practice.

    And when you go to, for instance, what happened at the beginning of the year, imagine now with the size of some of these advisor practices the ability to rebalance and take market action in a moment of market volatility like what we saw in February, in March, in April is extremely difficult. So, the growth of model portfolios is fueled by the need for advisors to find that scale and to better serve their clients’ portfolios and also, frankly, to help investors to stay invested.

    So, I think that one of the great benefits that we don’t talk enough about is through a model portfolio a client will stay invested longer. And by staying invested longer, we know that the outcome at the end of the day will be a better outcome, as opposed to a more transaction-based approach that leads to a lot of rotation and not necessarily the best outcome for, ultimately for our client.

    And we see that model evolving. Like I said, you know, we saw this strong growth in the US. We have seen this strong growth in Europe and Latin America is no different where these same value characteristics, the same benefits that it brings both to the advisor and to the end client are present and will fuel the growth of both a move to fee based and therefore also the growth of model portfolios.

    Nicolas Gomez: I want to end with this question. There’s a lot of talk about active ETFs. What are your thoughts around active ETFs?

    Armando Senra: Yes. The question about active comes up a lot here in the US as well. And let me be clear how it all begins. It begins with performance. So, how we think about how do we bring an active ETF to market? It begins thinking what are we trying to deliver to clients? Do we have the investment team and the performance in that investment team? And then, we think, secondarily we think around what’s the best wrapper? And in some occasions, it’s an ETF; in other occasions it’s a mutual fund. But we also have SMAs. We have many different vehicles to deliver solutions to clients and that’s really what differentiates BlackRock from other firms.

    So, the main consideration has to be the performance. If you package an underperforming equity manager in an ETF, you have an underperforming ETF. So, that’s one consideration that is very important, especially as there is a lot of noise around active ETFs.

    Now, that said, the reason we are launching more active ETFs to market, one, because we have great active equity performance and we find new ways. Some investors want to access it through an ETF, so we’re delivering clients on that solution. The other reason is that the ETF is in many ways a better technology for the end client. It will deliver, in the case of transparent active ETFs, which is most of what we have – everything that we have launched, it offers the transparency, it offers the liquidity, intraday liquidity. Remember that like when you’re investing in a mutual fund you have to wait until the end of the day to see the NAV. Investors, especially institutional investors, want that intraday liquidity. And, of course, again, you know, the simplicity that the ETF brings in portfolio construction.

    In the US, there’s also the consideration of a more efficient tax benefit for investors. But, broadly speaking, that’s how we think of active, how we think of building active ETFs, and how we think about how to deliver the best solutions for our clients.

    Nicolas Gomez: That’s great. Armando, it was very interesting to hear your insights about the ETF industry this year and also how these trends are happening in the region. It’s great to have you here with us today and thank you very much. Great to see you, and I’m sure this audience is very happy to see you as well.

    Armando Senra: Thank you Nico, great to see you again.

Megatendências: avaliando o desmantelamento através do ciclo

Manuela Sperandeo, diretora de Thematic, Sustainable & Factor ETFs da BlackRock na Europa, Oriente Médio e África (Europe, Middle East and Africa, EMEA), e Evy Hambro, líder global de Thematic and Sector Based Investing da BlackRock, examinam como as megatendências afetam não apenas as nossas vidas, mas também a forma como investimos, indicando o “que” e o “por quê” das cinco megatendências da BlackRock.

  • Manuela Sperandeo: Hello everyone, and welcome to this session on Megatrends: Assessing Disruption Across the Cycle. I am Manuela Sperandeo and I lead our thematic ETF business in EMEA for BlackRock. Thank you for your time today to discuss a topic which has really gained prominence in investors’ minds given the unprecedented changes that we are experiencing and as you have heard from the previous sessions today, is only going to continue going into 2021 and beyond.

    So, let me start by taking a look at the state of play in the industry today. 2020 has so far proven to be a record year for flows into thematic funds. The UCITS thematic fund universe, both on the active and in the index side, have had inflows of over $30 billion. This equates to more than 2.5 times what we had experienced in 2019. Just to give you a data point, when we started in 2015, this was an industry that counted for around $10 million. So, this really gives you a sense of the velocity of adoption that we have witnessed.

    To start this conversation, let me take a minute to remind ourselves the taxonomy when it comes to thematic investing. It’s has become a bit of a buzz word in the industry. So, […] it’s important to really bring some clarity on what we mean with this term. When we speak about thematic, we’re really speaking about an investment approach, so really investing across traditional boundaries across countries and sectors because we want to capture opportunities where they arise. It’s an approach that is targeted to the structural growth drivers that are shaping and disrupting the world in which we live. We call these structural trends “megatrends” and we have identified five of them- permanent shifts, the end drivers of change which transcend the traditional sector investing and we'll speak more about that. And then, the aim for our performance, this applies across both our active managed platform, as well as the index tracking solution, and we do that both by capturing our performance opportunities, by selecting themes and stocks that really are going to benefit from these megatrends.

    I am honored to be joined today by my colleague, Evy Hambro, who heads our global thematic and sector-based investing here at BlackRock. Evy has been a key pioneer of BlackRock’s thematic platform and has led the journey right from the beginning. He’s vastly experienced in managing funds and identifying these global forces. Let me start by asking you, Evy, how do we identify these megatrends and how do we capture them in the investment process?

    Evy Hambro: Thanks, Manu, and thank you for having me today. It’s a great honor to be here as well and to be speaking to you. And I hope that all of our clients are well, and their families are in good shape.

    When it comes to this area it’s to me absolutely an area of passion and excitement. When we think about thematic, we’re thinking about change, we’re thinking about how can we identify what the future is going to look like and what opportunities are we going to be able to harness for our clients by thinking about that? So, as you’ve said, […] one of the areas that we focus on is our five megatrends. But it’s digging deeper into those megatrends where we can really see ideas, where we can see opportunities, and hopefully where we can create value.

    A few years ago, we kind of collated together all of the information that we had and one of the advantages obviously as being part of BlackRock is the breadth of the platform that we have access to. All of the areas of specialist expertise, technical backgrounds, and so on, including our data analytics colleagues, really gives us a huge insight into that kind of future picture that we’re looking into. The last thing that we did though, which is probably on the one area of pulling all of this together, was to create a team called TRIG, the Thematic Research Investment Group. This is the area where we actually harness all of those information sources, all of the data, the idea generation, and work out which themes are likely to be the ones that are going to benefit our clients in terms of building those into portfolios.

    It’s also where we identify not just the themes themselves, but the underlying trends within the themes. It’s where we identify the investment universes that we can put capital to work in and also we can look not just into the companies themselves, but also into the data sources outside of that, going into the universities, engaging with the consultants, and so on. So, that engine is really the kind of powerful force that drives the thematic platform at BlackRock.

    Manuela Sperandeo: Thank you, Evy. Maybe let me build on something you just said and the critical role that the Thematic Research Investment Group plays. We’re really favored and lucky to have the ability to play to these themes, both via the index implementation and the active implementation. If I think about the development of these ETF index products, this has been one of the major innovations that we’ve had on the index tracking side.

    We have been working with index providers to really push the boundaries around data providers and look at alternative sources of revenue data, for example, to measure exposure to certain themes that would ultimately benefit from these megatrends. But, of course, the process of mapping some of these themes to the megatrend is absolutely active in nature and this is where the TRIG has played a key role. Can you tell us a little bit more about how you’ve been thinking about the themes to be played in an active way and those to be played more in an index construct?

    Evy Hambro: Yeah. So we actually have a very clear process in this regard. And I think one of the initial ones is simply identifying where we don’t have those skills on the active basis to capture those themes and those trends. But, to start off at the beginning, what we do, as you said, is we look at the data. We have access to tools that can analyze the revenue mix that companies are exposed to. We can see what percentages of revenue are being influenced by the themes that we’re trying to identify. If we can find enough of a market cap universe, enough companies in terms of individual investment opportunities that have greater than 50% of their revenue exposed to these trends, then it’s obvious that we would go down the path of an index product to capture that. It would be simplest for us to be able to do that and also there’s enough scope in the market to be able to deliver that exposure to the clients via an index product.

    Where the theme is often more nascent, or where the theme is just starting to drive change inside a business, you can imagine the acorn that’s been planted before it turns into the oak tree. It’s the fastest-growing part of a business, but it’s only 5% of a business’ revenue. Within a few years’ time it might be 20% or 30% and the market will be completely focused on that growth from that small area in driving the company’s multiple and rating that it trades on.

    So, identifying those is absolutely core and if they’re that small, then it’s too difficult to capture that via an index product. So, that’s where the active side of the business comes in. If we can combine that, identifying those companies with also technical expertise, because all of the active funds are run by managers who have technical knowledge on the underlying sectors and lots of experience in investing in that space, then we have that skill set that we can bring together to create an active fund. I'd say other areas of differentiation between the active side and the index side relate really to just access to opportunities. IPOs are another area that we look for sources of alpha.

    I'd say the last point on this is that with all of our thematic range, what we’re trying to do is identify trends that are about to go through an inflection point of change. And what I mean by that is where the growth that the companies are enjoying is so transformational that we see huge market adoption of new goods or services or new ways of consuming them that completely transform an industry or market. These are often driven by three forces. Regulation can be a significant driver and we’re seeing that in the automotive space today with the move away from car emissions. Society is another huge factor that we look for. Are consumers ready and able to afford to buy into that change? Do they want to consume it? Are they ready to embrace it? Often, change comes with uncertainty and people aren’t ready to adopt it. But, when the customer is right and the regulation is there, it’s it becomes pretty unstoppable.

    And then lastly, it’s about the economics. Is there an opportunity for a business to make money out of doing something differently to adapt to the change? If the economics are there, the margins are there, then the companies will be incentivized to deliver that different good or service. When those three factors together – regulation, society, and economics – are there, the force becomes pretty unstoppable and that is really when you start to see that inflection point in market adoption. If we can get a theme launched within our range of products, either index or through the active side, ahead of that change there will be massive value creation.

    Manuela Sperandeo: So, I think the point around the differentiation is very clear and I think it really speaks to the centrality of portfolio construction, which is absolutely central to everything that we do at BlackRock. So, I would like now to maybe shift a little bit and concentrate a little bit more around the use case for thematic investing. And so, very much share with you some of the recent experience around client adoption and really answer a question that we receive many times of where does it sit in my portfolio? So, what is the really the case for me to adopt these strategies in the context of a traditional equity portfolio?

    First, I think the point around change and disruption being underestimated and really drowned by the backward-looking nature of standard market index valuation is a critical one. And so, really this notion of the significant return potential that in many traditional portfolios at the moment is uncaptured and underrepresented. The other key application that we’ve seen investors, asset allocators in particular, turning to thematic investing as a fourth dimension of portfolio construction beyond the traditional country allocation, sector allocation, or even equity style factor allocation. And a lot of the work that we’ve been doing with our portfolio consulting team has really illuminated that, and so the complementarity of these engines of return.

    And I also wanted to share with you a recent anecdote from a large asset owner who recently got in touch with us, sharing concern on how they were under allocating to some of the emerging trends that Evy was describing. And so, they were really keen to access disruption across the cycle. And, of course, they were very aware that the traditional index allocation in their portfolio would have not allowed them to do so. And so, the work from our portfolio consulting team has been able to craft examples of portfolio on how to combine themes that would be complementary to existing client portfolios. And this is a service that BlackRock makes available to all of our investors. So please, make sure to reach out to your BlackRock representative if this is an exercise that you would be interested in having carried out.

    So, let’s have a look at the recent market, especially if we think about the COVID crisis and the world post-COVID. So, the future is getting here, clearly, faster than what we had all anticipated. Evy, what have you see in light of COVID, in light of investors’ preference post the COVID crisis?

    Evy Hambro: It’s one that we’re often , […] encountering in today’s market environment. I think that, obviously the pandemic has been completely tragic in so many ways, whether it’s the disruption it’s caused to the global economy, the shift in financial markets, and obviously some of the tragedies that are happening around the world in terms of the illnesses and deaths. But, I think with regards to the thematic area, what we've seen is that the pandemic has actually, […] whilst initially disrupting market confidence on some of the many themes that are […] prevailing in the overall economy we’ve seen enormous acceleration of trends that were already in place.

    […] If we’d look just at a simple one, […], people consuming online. […] that trend was in place. We saw that the retail businesses were under pressure. We saw many businesses going through bankruptcy and so on and more and more transactions happening online. […] obviously the pandemic with people not being able to get out to the shops and being fearful of doing so has really accelerated that trend even further. Whether it’s the move to flexible working, you know, again another trend that was happening and has now accelerated even faster. When you talked about getting places faster, this is exactly what’s happening on the back of the pandemic.

    But I think there are other bigger macro themes that are coming through as well, you know, the focus on the environment. Everybody is now incredibly clear about the damage that’s being done to the world as businesses have been operating in a kind of unsustainable way for so many years. […] just the focus on plastic over the last few years has really accelerated people’s consumption patterns away from that and looking for alternatives. So, I think that is a trend that has become clearer and is happening faster than we had imagined pre-COVID.

    I think other trends around technology, that’s obviously a broad one, but the move to digital as I mentioned earlier on, the way that we’re consuming, the data that we’re analyzing, the things that we’re viewing, it is really a kind of winner takes all market. And if technology isn’t in your business environment, watch out because it is coming soon. And I think that’s a watch word for just about every business that we think about.

    And another one would also be healthcare, which is an obvious one where everyone is very focused on this. But, the influence of technology on healthcare, data analysis, understanding what bodies are going through, […], only a few years ago people weren’t even thinking about having a health-related watch to measure the steps that they take or the exercise that they consume, the heart rate that they’re body is going through every day. This technology is going to get better. It’s going to get broader in terms of the data that it captures and it’s going to be useful in understanding illnesses and predicting things earlier. So, the health space is definitely growing a lot quicker post-pandemic than it was before, but it was a trend that was already very much in place.

    Manuela Sperandeo: The question we get asked many times which is, has thematic investing really graduated to a standalone segment of the asset management industry? I think we can all agree that the segment has really passed the test and I think it has been incredibly interesting to witness not only the resilience in terms of the flows that we described at the beginning of the session, but to any extent also the incredible resilience in performance. When we look at the book of business within the BlackRock offering, it has been an extremely resilient picture when it comes to performance, which then again speaks to the differentiated nature of the return that these strategies really offer in the context of a portfolio.

    So, I would like to really close up and take a look at the future. This clearly is a segment where more important than ever innovation is at the center of everything that we do in product development, both on the active side and on the index side. So, Evy, what is next?

    Evy Hambro: I think what is next is what thematic investing is all about. […] what we’re trying to do is to get a clearer picture of the future. We’re trying to spot trends that are already in place and then identify the ones that are going to be able to continue to grow faster than the normal market and to be able to capture the value differential from that additional rate of growth. So, that’s a really exciting question to think about and it’s one that we’re constantly debating on the team.

    To me, an area that really hasn’t gone through the huge change that we’ve talked about already in this call is around nutrition. Nutrition is something that, […], everybody is focused on. […] we consume things in our body every single day and our understanding of what our consumption does to our body is only really starting to emerge. And I think that the way we consume, what we consume, where it’s sourced from, the identification of the ingredients, how those things are produced, are they produced sustainably, the entire space is evolving very, very quickly and it’s an area that I'm extremely excited about.

    I sit here today on a farm. It’s one of my passions. We’re growing produce and we’re trying to do it as sustainably as possible. And it’s interesting now to see some of the customers that we engage with from our farming business just how they’re thinking, […] about what they’re putting into their products in terms of the ingredients. So, to me, nutrition is an area that’s going to go through enormous change and it’s going to create a lot of opportunities for us.

    Manuela Sperandeo: This is clearly where these strategies would sit in the context of the portfolio and this is very much work that we do every day with investors. Evy, why don’t you give us your perspective? In your experience, investors that already have allocations to global equity markets, what do they tend to substitute when evaluating these strategies?

    Evy Hambro: Yeah. It’s a great question. I think that the main thing that we see from clients is that they try to identify things that are real to them. So, when I'm thinking about talking about a particular subject or theme with a client, if that theme resonates with them, it’s often because they’re seeing it every day. The theme actually is brought to life because of how they are acting as an individual, whether it’s you’re walking down a street and you see an electric vehicle or it’s the shift in the fact that you’re consuming things differently or it’s the wind turbines you see with regards to sustainable energy, or solar panels. If that resonates with you and you can see the change every day, you see more happening and you’re more likely to buy into the theme.

    And so, what clients tend to do is that they will adjust their portfolio away from traditional asset classes to have an outside bet on something that resonates with them in terms of their daily life. And they would tend to just make a general reduction. It could be out of […], part of their global equity mix that might have – not have enough exposure to the theme that they’re after.

    But typically, we tend to see these outside bets made where they resonate best with clients. And that’s what we’re trying to do in terms of the offerings that we’re bringing to people is that all of those themes are real and the stories behind them bring them to life. And it’s, again, coming back to that inflection point. If you can be invested ahead of the inflection point or even part of the way up it, then you will have an opportunity to capture those outsized returns often, […],from the growth that you see in the space that’s way outside of your expectations.

    Manuela Sperandeo: Absolutely. And if I think what we have experienced on the ETF side, ETF at times have really not found a lot of adoption in the end client base. So, we would see that they tend to be very much a staple of asset allocation for predominantly asset managers, wealth discretionary. And my experience has been that thematic ETFs have been the first time that a true advisory audience have turned to ETF and exactly for this reason. I think it’s something that capture investors’ imagination and they could really relate to this notion of the rising importance of digitalization in their life or now more recently topics such as clean energy, which has been hugely popular with investors globally. So, I would say that also from an indexing perspective thematic has opened distribution avenues that were really untapped for indexing traditionally.

    Evy, so clearly there’s still a lot to do. Thank you for joining us today. It’s been great to have you in this session. I would like to wrap up and just summarize some of the points that we have covered today. So, this is an incredibly exciting time for thematic investing. This has been the year where thematic has really proven to be a very resilient segment of the asset management industry that has resisted a lot of the volatility in flows and performance. And so, clearly, it’s finding its way as a strategic allocation in a client portfolio. BlackRock has been a key driver and contributor to this trend. We are uniquely positioned, thanks to the benefit of having both index as well as active strategies that capture these themes going forward. And Evy and the themes have been pioneering really the coming together of these two parts of the business to really capture these emerging trends.

    Why now more than ever? The COVID crisis has really illuminated the need to be exposed to these structural trends and actually to really be positioned to a change that has come to us faster than any of us had anticipated. And as we go forward, what is next? Innovation is going to remain at the center of what we’re doing, and we’re really excited about everything that we’re working on and that could be researching in fields such as nutrition, as well as sustainability and more.

    I want to thank you all for joining this session. It’s been Evy and my pleasure to have you during this discussion, and most important for joining our first ever virtual Latin American conference. I wish you a good continuation and do get in touch with your BlackRock representative for any further questions. Thank you.

China: de nicho a necessidade

Um painel formado pelo “dream team” de líderes de opinião da BlackRock: Wei Li, diretor de Investment Strategy de ETFs e Index Investments na EMEA, Rui Zhao, Lead Portfolio Manager para Portfólios A-Share da China, e Wenji Lu, Equity Investment Strategist para a China, debatem as oportunidades para investimentos na China.

  • WEI LI: Hello. Welcome to our all Chinese China panel. My name is Wei Li. I run investment strategy for our ETF and index investment business. And joining me today to talk about China investing are my esteemed colleagues and thought leader on China. We have Rui Zhao, lead portfolio manager of the BlackRock China A-Shares portfolio within the systematic active equity team and we have Wenji Lu, BlackRock China investment strategist based in Shanghai.

    Before we get started, by way of scene setting and based on my many conversations about China investing with our clients, there are a couple of themes, actually three themes I would like to start with in terms of what I see accelerating this year when it comes to investing in China. Number one is that clients are typically under invested when it comes to China and we see that as a great opportunity for both China equities and China bonds. And increasingly what we see is that clients are starting to strip out China from a broader emerging market allocation and really treat it as a standalone piece both for tactical and strategic asset allocation considerations. And the trend is very much accelerating this year and the reason for that is that the decoupling between China and the US has very much meant that a historical correlation that used to work, that used to get you China exposures through developed market stocks can no longer reliably work and in order to get exposure to the twin growth engines in the world, China and the US, we actually have to own both. And if we look at the standard international portfolio, a lot of them already by design quite tilt towards the US. So, the big delta actually is really exposure to China, and it is really, really big.

    The second trend is a common question that we get when it comes to investing in China is, do we do it through active or indexing? Well, the answer is both. So, to prepare for this panel, I spoke with Susan Chan, head of BlackRock APAC and her experience of spending a lot of time talking about China with clients, her response really resonated with me, which is that when it comes to individual investment decision it depend on risk appetite. Both active and ETFs will grow at phenomenal speeds and both will benefit from this incredible growth.

    So, we have China equity experts today on the panel. So, I will use a China bond example to illustrate this. So, so far this year we’re seeing record inflows into China bonds within BlackRock and the flows into China bond funds are roughly split half/half between active and ETFs. And if you think about the recent announcement by FTSE to include China bonds into the WGBI index, the global government bond index, it very much potentially translates into $140 billion of the money in motion. When we have that kind of magnitude of potential money in motion it’s going to float a lot of boats across active and ETFs and that’s the direction of travel. So, in speaking to clients that ended up mixing both type of strategies, the reason that they give us is that they actually balance potentially each other out a little bit through market cycles.

    And the third trend about investing in China that is really picking up this year in a very pronounced way is that our clients are increasingly demanding that their China partners have boots on the ground. So, there is greater awareness that there are a lot of changes happening in China and they’re happening at a very quick speed as well. But, perhaps with a bit of distance some of these changes could be under-appreciated somewhat. Which is why it’s increasingly the case that clients are demanding that their China partners have boots on the ground to stay on top of those changes and to stay on top of the process, which is also why our Shanghai office is expanding so quickly now that we have the local license as well. And Wenji sees that every day.

    Wenji, so sitting in Shanghai office with a on the ground perspective, can we put COVID behind us in China and what is your expectation in terms of growth this year?

    Wenji Lu: Thank you, Wei. I think it’s too premature to say that China is completely out of the woods. Indeed, the people here start to talk about COVID-19 in past tense. In terms of GDP growth, Q1 this year China real GDP yearly growth was -6.8%. Q2 qualitative was 3.2% and this quarter we are on track to grow by about 4.5% and the last quarter probably around 6%. The full year growth for Chinese economy will be between 2% to 3% qualitative growth and next year probably due a low base will be above 7%.

    So, I think Chinese government is no longer obsessive with short-term economic activities. Actually, most of the sectors have gone back to normal. The movie theaters are probably the last sector to restart and September even the movie box office revenue has come back to a large extent of the level of one year ago. So, China’s government no longer focused on short-term growth, they have shifted focus to so-called (inaudible) five-year plan, which will set a path for China’s long-term growth between 2021 and ’25.

    WEI LI: So, Rui, Wenji is talking about normalizing growth coming back from the trough and it is no wonder that Chinese markets, Chinese equity markets this year, have done so well already. But, at this juncture, at this level, do you still see further upsides and where do you see opportunities?

    Rui Zhao: We actually believe there are still significant upsides, even starting from here, both short-term and long-term. So, as you said earlier, in the long-term we see global investors still significantly under-represent China in their portfolios. But in the near-term, we monitor this data and try to see when the consumption and recovery will start and how it will continue and that, from those data we have seen a very positive picture on consumption growth going from Q2 and all the way to Q3.

    So, just to give you some examples, we are monitoring consumer transactions, both in-store and also online. As we expected, the online transactions have grown 25% to 30% due to the lockdown and people staying home. But even the in-store transactions we have started to see the recovery trend, a little uptick in the recovery even though the year-on-year number are still negative around 25% to 30% negative. But the trend is on the recovery side.

    So, I think we know China is a large market. It has a big middle class and we’ve seen the increasing productivity over the past decade from technology. So, we believe the growth can continue and we have data that we monitor closely on a day-to-day basis.

    WEI LI: So that’s actually really interesting, Rui. You are talking about the big data also suggesting rebounding growth activity. So, the big data is very much corroborating with the macro perspective that Wenji is sharing with us. But, when you talk about this systematic approach, right, to use that and for investing and to gauge the impact of COVID on activities, how does your systematic approach work in a year of COVID where there is really no historical template? We have never been here before. How can you be so confident that this way of approaching investing is going to work?

    Rui Zhao: I think you ask a very interesting question and I think many people probably think the same, that this period we have never seen in history. But from our perspective, as an experienced systematic investor, we actually think it performed like almost exactly the same. So, the market never changed and that’s also how we model, how we viewed our model to forecast the stock returns. And when we think about like how we can better forecast the future stock return, it’s always three components: fundamental, sentiment, and policy scene. And this year that’s exactly the same and also maybe even amplified by the lockdown period, because we have more data to help us to capture the fundamental change and also we have more people trading or participating in the stock market so we can get a better sense of the investor sentiment.

    So, I think, you know, to your question, we’re actually seeing better performance in our signals this year and the better performance coming from all those three pillars in our model, fundamental, sentiment, and policy scene. So, just to give you another example here, so I mentioned for fundamental our goal is to forecast the near future growth that hasn’t been accounted in the market and we noticed that this year so far the domestic leaders actually have become a dominant player in this market and we believe that’s something going to last for the next few years. And those domestic leaders, not only do they have a better position, a better branding domestically, so that can help them to take market share from a fragmented market during this extreme period. But also, they also have the support from the government because they can provide more help to society to solve some of the job problems.

    WEI LI: That's fascinating. So, that is your secret sauce for your great fund. Now, Wenji, we talk about, well, we catch up a regular basis and every time you are telling me about China tech and all the fantastic developments that China is pushing in that space. But technology is also right in the center of this confrontation, this strategic confrontation between US and China. In a year that US/China relationship is very much in the center of the – of markets focus as well, technology has delivered great performance, and some may argue that it is justified because earning potentials. But is it still a good time to be looking at technology and specifically China tech?

    Wenji Lu: I will give you three reasons that you look at the tech space at this juncture. The first reason is the supply chain resilience. We often talk about the global supply chain relocating away from China. But the reality this year is that during the pandemic these Chinese factories, they just keep running, even at the height of the pandemic.

    The Shenzhen city is a manufacturing hub. If you want to manufacture from a smart speaker, a satellite, you could find all the component suppliers within a radius of 200 kilometers. So, the supply chain resilience has been proven during the pandemic. That's why it’s not surprising that the recent survey conducted by American Chamber of Commerce in China, 79% of the respondents reported no plan to relocate away from China. The percentage is actually higher than last year, 73%. So, that's the first reason.

    The second reason is China’s very big domestic market, which Rui mentioned earlier. If we look at the retail sales in China, about $6 trillion US every year. It’s a similar size of United States. And thinking about the specific high-tech sectors, new energy vehicles, sales in China every year right now is about 1.2 million. In the United States, less than half a million. So, we are quite confident that in five years’ time you could see Chinese companies will actually command the leading positions in the global supply chain for new energy vehicles. It’s almost surely to happen. Just like Chinese manufacturers did in past 40 years, supply chains of personal computers and the smartphone.

    A third reason is actually cost efficiency. President Xi Jinping recently spoke at the United Union Conference that China aims to achieve the carbon targets by 2030. China will have the carbon emissions peak before 2030. One source of his confidence is that China’s solar power manufactures, these tech companies, in the past decade they have slashed the cost by 80%. And in the next decade, they will slash the cost further by 80%. So, any country serious with their climate (inaudible) target, it’s just very difficult to completely decouple from Chinese technology.

    For these three reasons, supply chain resilience, very large domestic market, and cost efficiency. That's the reason I think that we should focus on China tech advancements for long-term.

    WEI LI: That is so well said. Just now, Wenji, you talked about kind of another reason for China tech is cost efficiency and going green and here I want to bring in Rui, because a lot of clients ask us, you know, like how do we look at China in a context of ESG. Are there any signals that you can help us with to understand a ESG lens when we look at China investing?

    Rui Zhao: So, at BlackRock our investors care about ESG, so not, you know, just our team. But we do have a unique approach to ESG. So, because our investment process involves data and technology, so we were able to process all the data that we could find related to the company out there and use machine learning to analyze all the different component, different features of the company and come up with a better solution that which company positioned like good or bad on the ESG front.

    So, honestly, I think the ESG concept is still relatively new. When I say relatively new, it means each person have different interpretation and there is no like consistent concept, you know, about ESG globally. So, that is the benefit for us. Because of the data we have, we can also measure it from many different perspectives.

    So, for example, we have seen that, you know, China has been very focused on environmental protection and on the green energy front. So, China has produced 99% of the electric bus in the past two years and also one-third of the electric cars in the world.

    And in 1918 [sic], China alone built more green electric facilities than any country in the world.

    So, that’s like how much the government is focusing on sustainable green energy. And I think the reason they do that is also because they’re still in the growing phase, so they still have a view, you know, to design, like what type of growth path they want to take. And that also provide us a lot of the data. So, we see the – from the company a social responsibility report and also from the different awards evaluations that the government is doing. We can also take those into account and to analyze the position of a company on sustainable investing.

    And on the governance perspective, we also benefit from the vast amount of data. Now, you know, from our observation China has the most strict disclosure requirement in the world. You know, it’s more strict than any other country. And the reason for that is because the government recognized this market is still very immature, is still dominated by little investors and they do want to protect the benefit of the little investor who does have information disadvantage.

    So, to do that, they ask a company to disclose everything online, everything related to a company online so that anybody can search for it. And that’s really benefited, you know, our approach that really combining and looking through the data so we can see almost everything happening to a company and analyze with the other data point we have. So, we never rely on one single data series, but we can have a more comprehensive view of the company.

    And then lastly on social, I think, you know, even though China is a very old country, has a long history, but the (inaudible) figure out what is the best way to treat the society and to help them to maintain job and to grow and the way also take these credits to the company who can treat their employees better, can provide a better education, continuous education opportunity to their employees, and also can contribute back to society. So, because for those companies they are also more in line with our philosophy, they are more focused on sustainable investing. So, that’s why we like – we tend to give credit to those companies.

    But again, so we have so much data and all the data will fall under either fundamental, or sentiment, or policy category and we never rely on any data. So, it’s always a comprehensive view of the company.

    WEI LI: I think that’s fascinating. So almost in a way that when it comes to assessing companies on ESG metrics, especially as it comes to Chinese companies, it’s better to look at big data and get as much data and process as much data as possible, rather than relying on traditional metrics that may not apply like for like in the context of China, but also could be potentially gamed. I think that’s absolutely fascinating.

    Now, Wenji, you sit in Shanghai and you experienced how China has navigated the COVID crisis firsthand, right. I remember speaking to you when you were in lockdown and when UK was just kind of following in China’s footsteps into lockdown earlier in the year. So, what are the lessons learned? With China being ahead of the curve, what are the lessons learned on the ground and also themes that has transpired this year that you think could last into a post-COVID world?

    Wenji Lu: Yeah. This is a tricky question. I don’t know whether all China experienced like other countries. For example, here I think the public transport system has almost got back to normal. The subway system (inaudible) rate right now is above 90%. People feel very comfortable and safe to take subway. Maybe other countries, people would prefer passenger cars even after COVID.

    But some lessons I think could be helpful for other countries of the world, if we put a framework here, I think there are two categories. One category are the sectors which already have very strong growth even before the pandemic, for example, the food and the grocery delivery or tele-doctoring, or for example, the e-payment, nutritious food and beverage, brain food. I think these sectors have continued to see very high growth, even after the pandemic.

    The other category are the sectors where the demand almost solely depends on the pandemic, for example, remote office or home entertainment or online education. I think some offline operations are still more effective or productive as online. In China, we observed deep demand tend to fade in such sectors.

    So, I think China’s experience is quite mixed. But indeed, the pandemic will take some structural changes on consumer behavior and on employers’ behavior as well.

    WEI LI: I'm afraid that’s all the time that we have. So, I'm hearing big opportunities but choose wisely, the exposure, the investment themes, as well as the partners that you

    choose to access China with. And I'm certainly picking up a optimistic note as well, albeit with caveats. And I think that is a great note to end on, you know, optimistic, cautiously optimistic.

    So, with that, thank you so much Rui, thank you Wenji, and thank you everyone in the audience for your attention and engagement. Thank you.

Promovendo uma nova era de investimentos alternativos

Edwin Conway, líder global de Alternative Investors da BlackRock, e Roque Calleja, diretor de Alternative Specialists da BlackRock na América Latina, analisam como o mercado de investimentos alternativos está evoluindo na região e como a BlackRock acompanha essa evolução.

  • Roque Calleja: Edwin, so great to see you! Really looking forward to our conversation. And thank you, everyone, for joining the session today. So, getting directly into our subject for the session, why don’t we start by unpacking the phrase “championing a new era of alternatives”? What do we mean by this, Edwin?

    Edwin Conway: Roque, thank you and thank you to everybody who’s joining us. Very excited to have you. […] It’s something we’ve been saying now for some time, Roque, as you know. The alternatives market has been evolving really rapidly in response to a number of things.

    Certainly, the industry dynamics have changed quite demonstrably, and they’ve been reshaping this industry writ large. You’re really seeing a much broader and a much more complex opportunity set from the investment standpoint that allows us to reach in to alternatives and apply them to a portfolio in a way that, quite frankly, you couldn’t in the past. And when you look across the board, all of our clients are no longer looking at alternatives as a “nice-to-have” in the portfolio but it has really become a “need-to-have”. They’re using this as an approach, not just for return enhancement, but also diversification. And in a world where there’s great uncertainty, obviously, resilience is top of people’s minds.

    So, all of those perspectives, certainly from our standpoint, is leading or creating this new era of alternatives. But that said, clients are facing a number of longstanding hurdles, which is really limiting their ability to take the full advantage and the full potential of alternatives in their portfolios. So, we believe the industry is not only at an important juncture where these hurdles must be challenged - we believe they must be addressed to be able to champion this new era and to do so on behalf of our clients. And we think this is a really important next evolution to what has become a core holding for our clients and really not an “alternative” holding.

    Roque Calleja: That's very interesting, Edwin. And for sure we’re going to come back to a few of those points that you have mentioned in more depth later in the conversation. But, if you don’t mind, why don’t we focus first on the trends now. Why don’t you walk us through some of the key trends that, you have seen in the alternatives space that has shaped it into what it is today?

    Edwin Conway: If you think about the evolution of this industry - and let’s not forget, it still remains approximately 10% of what is now a very significant investable universe across stocks, bonds, and everything - but interestingly, it’s growing now twice as fast as public equities and twice as fast as debt.

    So, the industry, which now would approximate $11 trillion, is really heading, based on the research reports we’ve seen, towards about a $14 trillion industry by 2023. That's extraordinary growth. But there’s really a number of factors obviously driving this growth.

    Our interest rates globally are really at historic lows, and we’ve been talking about low for longer for an extraordinary amount of time. That will persist. And when you combine that with this multi-year disappointment with public market alpha from active management, and then layer on that, too, the difficulties in building true portfolio diversification, all of this is leading to our clients looking towards alternatives to help them meet their long duration liabilities.

    Now, from the market standpoint, if you think of both public and private, there really is a historic shift going on. You know, private markets are really playing much more prominence. If you just take a step back and look at the number of listed companies in the US, as an example or a sample set, that’s dropped by 41% over the last 20 years. In Europe, not so much, by about 12%. But certainly, the population of private companies has continued to climb. Actually, it’s exploded relevant to that in the public domain.

    You’ve also seen banks really take a step back, too. So, these middle market borrowers are creating opportunity for non-bank lenders: an opportunity to step in in place of banks, which used to be a very significant participant and no longer are. And I think one of the big conclusions, as we take a look at our clients’ investments, not only are they underweight infrastructure, but actually, infrastructure investment writ large is really below what it’s expected to be. And what I mean by that, global infrastructure investment needs are projected to be approximately $94 trillion between 2016 and 2040. Based on that private capital is going to be very necessary.

    So, growing demand for alternatives we believe will persist, and it goes beyond just attractive expected returns or resiliency in down markets. It’s now become a critical ingredient in more holistic portfolio construction. And thus, we're seeing this very significant pivot from not just the global institutional investors and clients, but also wealth investors towards this space.

    You know, with that too, we’re talking to a global audience. We’re seeing a lot of requests on us and other managers to really think more locally, too. […] It’s a global set of asset classes, but you're demanding of us now some more local presence, and that’s in infrastructure, that’s in private equity, that’s credit. And just based on what we’re seeing from the surveys we conduct, […] we’re seeing on average the institutional client base segment, for example, telling us they’re looking to increase alternative allocations by anywhere from 8 to 12 percentage points going forward.

    So, take the typical US public pension plan as a proxy for what we’re seeing happening. On average, they’re 72% funded, certainly now relying on private markets, which have historically delivered returns more than 9% to meet what typically is a 7% annual target return. So, hence, they continue to lean in, and this continues to be an important part of their future.

    But this is true, Roque, across all client types. The demand is significant. Demand is growing. But really, the change that we’re really starting to see is that it’s no longer about buying into a fund or getting a fund exposure. It’s become so large in the context of a total portfolio. That’s really part of the question going forward: how do you satisfy that growing need, and how does that need get solved in the context of what you’re doing in public markets, too?

    Roque Calleja: Thank you for that, Edwin. And I think that’s a very good lead way to my next question, and something that you mentioned at the beginning, is the opportunity set and how we should take a closer look into the broader and more complex opportunity set that we're seeing now in the market, especially after the pandemic hit. So, why don’t you share with us a little more detail on some of the opportunities that you're seeing, what does the opportunity set look like today, and what are the team and investment teams currently focusing on?

    Edwin Conway: So, a lot has changed and I will say […] I hope everybody on our call today and are joining us has remained safe. But we’re seeing really interesting structural shifts that will have a very long-term effect on how we think about building portfolios. […] When you think about private markets, we’re really thinking about investing for the longer term.

    So, we are in a moment of time of great stress globally. This is a long-term tailwind obviously that we’re facing with regard to COVID and […] we’re looking to, through patience and through the appropriate underwriting, put together investments that can be resilient against this headwind that we’re facing, but others that will come.

    So, you know, we’re looking at dispersion now amongst these investments and across managers being really high. And, you know, quite frankly, some of the themes that we’re seeing as a result of this new level of volatility, this heightened degree of uncertainty - we’re seeing hedge funds really starting to thrive in this environment, because that active environment allows them to really lean in and find those opportunities of relative value. But you’re going to see a tremendous amount of dispersion of returns and outcomes, as a result of what we’re living through and also, quite frankly, the talent pool that sits within there.

    So, certainly hedge funds will be able to take advantage of this opportunity, by virtue of the dislocations that are in front of them. But the dispersion between the winners and losers from the hedge fund world will be great. […] We expected tailwinds for renewable power to absolutely continue. There’s a significant energy transition that’s happening in the world today, and we believe, its role as a diversifying asset means it’s really important for all private market investors to consider this as an add-on to their total portfolio. It provides tremendous diversification, but it’s an asset that can also provide tremendous yield.

    You know, we also think about the secondary market and how it’s evolving - really interesting to take a step back and look at that. Year-over-year, private equity secondary opportunities has just flourished in our mind, particularly since 2008. It’s been a great provider of liquidity, and, quite frankly, it’s also been a provider of great price transparency.

    […] As private equity has become such a significant part of most of our clients’ portfolios, it’s a very sizeable market. It’s the secondary opportunity set, as a result of these dislocations we’re seeing, as a result of the richness of the deal flow - actually another really interesting place to contemplate making an investment, because the risk/return dynamics feel very favorable.

    Private credit also playing a really important role given this growth of the underlying economy. And particularly, when you look at some sectors and industries which will, we think, do very well through the cycle: technology and healthcare are obvious ones that we believe need private capital, have this propensity for growth, and we think, through this environment that we’re facing now, actually, it’s a prudent place to think about deploying even more capital.

    And then finally, we definitely see solutions even in the distressed capital space, as this crisis will lead to companies who just need to restructure. But, needless to say, all of this activity and flurry of activity will force us and managers within the alternatives space to really spend a lot of time underwriting - underwriting correctly, and ensuring we’re applying all the right information to make those prudent decisions on behalf of your clients.

    Roque Calleja: Great, Edwin. So, changing gears slightly, why don’t we discuss the challenges that investors are facing in this bid to increase allocations to alternatives? And actually, you know, a lot of those challenges are enhanced when you think about access from our clients in Latin America.

    Edwin Conway: You’re certainly seeing these larger allocations, and as a result of those larger allocations, a much bigger impact on the overall portfolio returns. But investment approaches that have worked in the past, I would question - will they work as well in the future?

    So, there’s really longstanding hurdles to overcome, and not just that. When you couple the flow of assets that we would expect into alternatives, more broadly speaking, you will see spaces where crowding will exist. You will see performance dispersion that’ll be great. And in a world where you’re looking at many of our clients having either the ambition to have a much larger alternative allocation relative to the total portfolio or already having a significantly large allocation to the tune of anywhere from 30% to 50%-plus, that means, again, alternatives are not alternative. And the reality is we, as an industry, need to support these clients who will demand much greater transparency, because they need it.

    They're going to be demanding of us much more persistence in the returns we provide, by virtue of the scale of this investment and the prominence in that total portfolio. This has to be more about outcomes as opposed to selling funds. So, I think we’re seeing some really interesting shifts. I think as an industry, rightfully so, there’s pressure on the alternative asset managers to be much more transparent, prove greater persistence, and hopefully, not provide the dispersion that we’ve seen in the past - because one thing you may not know, the dispersion in private fund performance is actually wider than that on the public markets: 14% approximately compared to 7% in public equity markets all in 2019 surveys that we’ve locked and done.

    So, what does this mean? It means manager selection, more so now than ever, is really crucial. But it’s really hard to do. It’s time intensive, it’s data intensive, and as we mentioned, because of the lack of certain transparencies that have existed in the past, the dataset to really do rigorous due diligence in underwriting is harder.

    So, dispersion is high. Manager due diligence is hard. And as you think about now with size and prominence, what really is the role of alternatives relative to everything else our clients are doing? So, there are question marks around, you know, how one should use them, how efficiently should they own them, the understanding of our clients of all the underlying characteristics of these investments and their associated risks, and then how to manage them effectively so they’re not just a stagnant, stationary pool of assets, but how do you also increase a degree of dynamism into that portfolio? I mean this all speaks to a lot that we have to do in this industry, how we have to evolve, how we have to adapt, and certainly, align incentives to that of our clients, increase the level of transparency, and I would say, a really important part of our future is the necessity to innovate through technology to support better transparency, better information transmission, but also portfolio construction, because remember, our clients are making a decision to forego an investment in one asset class to include another. And if you’re giving up an active public market equity allocation for a private market equity allocation, really understanding not just the why you’re doing it, but the consequence to the total portfolio as a result of doing that is really important. So, technology and data together to enable a much better comprehension of the potential risks and opportunities we think is great.

     

    Roque Calleja: That's great, Edwin. You mentioned that the industry will need to evolve and adapt. That, of course, directly involves BlackRock as a key player of the industry. Why don’t you share with us how BlackRock is evolving and adapting to what you call this new era of alternatives?

    Edwin Conway: I think what you're seeing, certainly in my mind very clearly, whether we spend time with our wealth clients or our institutional clients, I think a critical part of what we have to be is very empathetic to all of the outcomes your clients are looking to achieve. And as mentioned before, I think as an industry certainly alternatives has been more inward looking. I think it’s an industry that has been overly sensitive around transparency, overly egregious with regard to fees, and very much thinking about a fund-by-fund type of approach to interacting with our clients. I think those days are over. And quite frankly again, that speaks to this new era that’s upon us and that we have to champion as an organization, and I believe we, quite frankly, we have.

    Listen, we believe some of the best opportunities going forward will result from having a leading sourcing platform. With all of these assets coming into the alternative spaces, across all of the asset classes in alternatives, obviously, the competition will be great. And having a deep understanding of what will win in the environment in which we’re operating, we think is a critical part to the future.

    So certainly sourcing, access to deal flow, for which we believe we have given the heft of this organization - thank you to you, our clients, for giving us that opportunity, that allows us I think to see so much more than those that we compete against.

    […] We look to offer much greater transparency. I think it’s an important part of our heritage for over 33 years. […] Therefore, how we’ve utilized Aladdin, and now brought in eFront, Roque, […] gives us a mechanism to unpeel this onion and allow this to be much more visible to our clients. So, not only can you see exposures and understand them at a fund level, but you can do it all the way down at a very granular level down to positions. And, importantly, as we build these technologies, the goal for us is to have that much more integrated view.

    […] When you're a 30% allocation or a 50% allocation or somewhere in between, meaning an alternatives allocation, as part of your whole portfolio, again it’s not alternative. It’s critical, it’s significant, and we need to continue to share the impact these private market exposures will have, and alternatives, including hedge funds, will have to the more traditional exposures your clients have. So, that integrated whole portfolio view is certainly very important. The alignment of interests with regard to terms and others, and kind of being on this journey with you is really, really important.

    Last but not least, specific to LatAm, you know, at BlackRock we have close to 200 people on the ground. So, we definitely feel very connected to your local ecosystems and certainly understand that each investment regime is different. And we want to be very creative. We want to be very flexible as a result of your evolving needs.

    When you take a look back at us as a firm, obviously as part of a broad enterprise, we today are a large part of BlackRock. And certainly with 1,000-plus employees within BlackRock Alternative Investors within 49 offices around the world, hopefully, that gives you a sense for not just us, but I'm sure the rest of the industry, the importance of being local, being connected to those local markets, being able to originate in those local markets because sourcing in our mind is a critical advantage going forward. That can be a real alpha advantage when done right.

    Being able to help you think through this time horizon – these are long duration investments – and thinking about that step function you take to bring them in to what is your portfolio, is something that we have to continue the journey with you on.

    And an example of where we’ve tried to be creative and create structures and vehicles to support you is around the CERPI vehicle, which we launched most recently in Mexico. I think this really brings the best of all the asset classes that we manage on a global basis, but through a unique structure to you in the market. It’s a flexible structure. We feel it’s aligned, and we feel like we’re putting our clients’ best interests first

    Roque Calleja: Thank you, Edwin. So, with those comments we have to end our conversation for today. Thank you again. Always a pleasure to chat with you. I'm sure the audience will benefit from spending more time with you, but our time is limited. Hope that was interesting for everyone. Thank you for joining.

     

Mercados privados: uma abordagem de portfólio total

Pam Chang, Chief Investment Officer e líder global de Alternative Solutions Group da BlackRock, juntamente com David Lomas, líder global de Alternatives Specialists da BlackRock, analisam em detalhes o tema da construção de portfólios de investimentos alternativos e como os investidores deveriam pensar quanto a uma “abordagem de portfólio total”, especialmente no contexto da COVID-19.

  • David Lomas: Hi everybody, and welcome to the Latin American virtual conference. My name is David Lomas, and I’m the global head of BlackRock Alternative Specialists. And I’m delighted today to be joined by our CIO of our Alternative Solutions Group, Pam Chan. So, first of all, Pam, welcome!

    Pam Chan: Thank you, David.

    David Lomas: So, Pam, I’ve got to start with the first three-letter acronym, which is WOW - what a year so far, and we still aren’t finished. So, what lessons can you take, or can we take, from the GFC and other crises as we think about the current market environment?

    Pam Chan: Definitely - the WOW acronym is the appropriate qualifier, definitely one of the most bizarre years on record, 2020. I’d say a couple of things. We did a study of various historical crises, and the first thing I’d acknowledge is no crisis is the same as the last. That being said, there are some interesting learnings actually from the 1918 crisis around the flu then, especially given the pandemic that we have amongst us today. I think a couple of things that I’d like to highlight. One is that actually in the midst of that pandemic, we saw equity markets roar up - the same way that we have seen today.

    Part of that at the time was, frankly, due to World War I, and as we think about today, you have again exogenous political efforts, whether it’s fiscal or policy measures from a governmental perspective that have buoyed markets, yet again. I think the other element to bring out here is that in that historical occurrence, we saw that the second wave was kind of the deadliest wave in some sense, and what that meant for then the path to recovery. One thing that we are observing very closely on our end is how resurgence across the global, what shape that takes, and what effect that will have on markets.

    I think the second theme that I’d draw out is that recoveries have always been longer than the crash, and this time is no exception, especially with the unprecedented speed of the crash and then the subsequent kind of jump by policymakers into the fray. And just to give the audience a sense: for Black Monday, recovery was 7X longer than the crash. GFC was 3X longer. The fastest we’ve ever seen was in the 1980s, where you had just under two years - 21 months. We’re definitely not going to be inside of that is my own view, and I think that’s the conversation that we’ve been having internally across the alts platform as well.

    The third thing that I’d say, which is pertinent to the alts space that we sit in, is really the role of private markets this time around. We’ve never seen the private markets so large and frankly, so heterogeneous and complex. That pairs with the fact that companies are staying private longer than they ever have, and so both on a relative and an absolute scale, I think the private markets will play an increasingly large role this time around than they have in the past.

    David Lomas: As you think about that volatility and the growth of the private markets, just help me understand. Is now still a good time to increase your exposure to private markets?

    Pam Chan: I actually think that even more so than pre-COVID. That’s how we are positioning ourselves. That’s how clients are coming to us, and I’d say there is a number of different factors that play into that. One is we obviously now are in an environment where rates are going to be much, much lower for much, much longer across the globe. So there is definitely kind of a desire to add the marginal contributor to return, which in this case is the private markets and the risk premium associated with that, given underlying investors’ kind of absolute and overall return target whether to satisfy liabilities, spending needs, etc. I think income also plays a large part in that as we see kind of public fixed income markets continue to compress, so there’s a search for that yield, and that has only accelerated.

    I actually think number two would be, as we think about the volatility, on the private market side you have much less exposure to the technical sentiment of markets that we’ve clearly seen on the public side. There definitely is an attractiveness there where you can focus on the fundamentals as opposed to kind of the news flow of the day.

    The third element is how you think about idiosyncratic risk exposure across the private markets versus the market factors that you may otherwise get exposure to on the public side, and we see a continued drive toward adding those diversifying risk exposures, which you can craft on the private market side in a way that you cannot manufacture in liquid markets.

    And then fourth, what I would say is there’s just been continued secular trends toward the private market space, whether we think about the uptick in private credit given the re-trenching of banks that has been a gradual occurrence since the last GFC, but that is continually the case, the global demand for infrastructure build. There’s just a whole slew of secular trends that, in our mind, has only been exacerbated post-crisis. And so, the last thing I would add here is that despite the 2.7 trillion of dry powder, which a lot of us talk about on the private market side, the growth of that has slowed post-COVID.

    We’ve seen now deployment pick up second half of this year, as folks come out of the initial shock of the pandemic, and amidst that, we’re also seeing pricing moderate, so whether that is seeing private equity multiples go down about a turn, or cap rates up about 50 basis points, or yield to maturities-on-credit instruments going up a couple hundred basis points - all of that I think is especially pertinent in the context of the low-rate environment that I discussed earlier.

    David Lomas: Brilliant. So, plenty of opportunity out there. Let’s bring it to life for the audience. What asset classes are you looking at right now - and then, importantly, why?

    Pam Chan: So, I would say a couple things. So, one, we were just talking about income and spread levels. Look at high-yield spreads. They are off the thousand-plus wides that we saw in late March, but we need to keep this context because the current levels are still 2X wider than they were at 2019 year end, and frankly, the 80th percentile if we think about it since 2010. I think that, combined with a flexible approach to investing across the cap stack, may bring opportunity on the distress side of things, which we haven’t yet really seen in full force. I think that’s one element, and we start to see leverage loan defaults tick up, and while immediately post-COVID you didn’t see that being developed, I do think that, especially across certain sectors where the fundamentals have only been buoyed by policy subsidy, we’re going to start to see some of those elements, and been very focused there and preserving kind of flexibility across the cap stack.

    I’d say a second element that we have been really focused on is structured growth equity, as we think about different ways to buy into business models fundamentally that we believe in but where the underlying performance is not so tied to capital market structure optimization, if you will, or financial engineering. So that’s one element that we’ve quite liked. I can give you an example where we transacted on a particular deal where the company was amidst fundraise kind of pre-COVID, into COVID. One of the elements that they were able to get there is protection whereby if evaluations fell 60%, we would still be kind of at a 1.0 multiple. So those types of structures, frankly, I think are very attractive, especially where you can preserve some of the equity upside.

    I would say kind of hearkening back to the first question you opened with, we saw the same trend toward I’d say delevered equity after the Lehman Brothers crash, so we see that uptick again in that type of transaction.

    The last thing that I’d highlight is kind of the weird and the wonderful, as one colleague likes to put it, the kind of niche-ier asset classes on the private market side. What we’ve seen, and we do a lot of risk modeling on our side, is the diversification benefit of adding idiosyncratic risk exposure, whether that’s intellectual property or we see rates hardening and reinsurance. That diversification benefit is now up 20% if we add it to a 60/40 portfolio than it was pre-COVID. There’s definitely a drive toward those niche-ier asset classes.

    And I would say that the market has responded in so far as we anticipate, and you’ll see this in Preqin too - that while they only represent about 5% of the private markets today, there’s an anticipation that over the next few years that proportion of the market will double to about a 10% with the absolute growth course in the private markets as well, on top of that. So those are some areas that we’ve been focused on across the board.

    David Lomas: Great and very diverse, and it actually leads into my next question, which is: many of the investors that I speak to around the globe, they really exhibit a whole-market bias in their portfolio construction, and we understand some of that will be for structural, regulatory, or even FX purposes. But what advice would you give to our Latin American audience today about building a diversified portfolio and not being constrained by the whole-market bias?

    Pam Chan: I think that the key, exactly as you put it in the question, is whether the bias is intentional. So, to your point around regulatory constraints and FX considerations, I would add in there sustainability insofar as investing in your home country. So, if it’s intentional I think that’s one thing. I would say that what we’ve observed is that most folks are kind of under-allocated internationally, not for kind of a strategic bend toward home bias. And there, what I would focus in on is really how interconnected everything is and doing a more fundamental risk factor review to gauge both qualitatively and quantitatively what are the market trends, macro exposures that you’re otherwise exposed to. I think those things are key as we think about home bias, especially as we kind of move away from a more globalized world to something where national identity is going to play a much stronger role in that, and we’ll see different paths for different countries as well, kind of pandemic as one element, but one of many. So that’s one element that we would suggest.

    And then, frankly, also thinking through, exactly to your point, what are the FX considerations you look to diversify, and what is that return in your home currency or the currency in which you need to spend?

    David Lomas: So, as you think about the audience today, what would your advice be around how much private market exposure you think would make sense in today’s environment based on the region as you know it?

    Pam Chan: So, I would say a couple things. One, we always come back to risk tolerance, liquidity and overall outcome, in terms of guiding the amount of private market exposure one should have. That being said, two observations: one is that folks generally still remain under allocated in so far as both the commitments and the amount of funding - dollars funded, I should say, within the private market space in the context of their strategic asset allocation. That’s observation one, for the most part.

    The second thing is as we think about the SAAs themselves, relative to the amount of illiquidity an underlying investor may be able to take, we’ve seen across the board that folks there are also kind of under shooting what they could otherwise bear. And so, we did research, in conjunction with our investment institute last year, just to observe this phenomenon, and I think it’s only gotten kind of underscored in the post-COVID world. But just to give a sense - the way we’ve thought about calibrating is that you should be able to fund out of your public market allocation two years of spend. That’s the calibration, and in that context, what we found was the folks that should limit their illiquids to less than 20% are those that need to spend more than 8% a year. And so, that is a pretty stark contrast relative to where everybody is, and obviously it takes time to build a private market allocation, but something to definitely bear in mind.

    David Lomas: Great. And as I reflect on some of the conversations that I’ve been having globally, one of the interesting dynamics of conversations with clients is everyone wants the highest possible return, and they want the lowest possible fee. And as I think about the concept of what I call alpha decay, which is over-diversification, we do see portfolios that have lots of juice inside them, but they don’t, at an aggregate level, return. So, I’d love to explore that for a second. And I’d just love us to also spend a moment on: does it really matter if a product is one or two basis points cheaper? I’ve got a live situation right now where that is the argument, and actually, the bigger argument is investment integrity and portfolio construction. So just as a CIO of a portfolio construction part of our business, how are you thinking about alpha decay? And then obviously, is it a gross or net return that you’re really focused on in that construction?

    Pam Chan: Taking the two parts of the question in turn, on the first one, you’re right that many investors tend to lean more line items on the private market side, with the view that that is going to provide them with diversification benefit. I think that actually comes back around to one of the themes that we discussed earlier in the session, which is what is the real risk exposure that you have in the portfolio and whether or not kind of having three companies in the same sector or three assets in the same geography or you could have an oil and gas deal, a real estate transaction in the Permian Basin in the US. You could have another infrastructure transaction. All of those share risk factors. I think part of the underlying tenet is how do you really get look-through into your portfolio, so that you really understand what is driving performance to help avoid, frankly, the alpha decay that you’re describing?

    I have other colleagues who are very well-versed insofar as manager selection, but the way that we think about it, on our side, is really putting together the right set of risk factors when you drill down into each of the holdings, and whether or not that incremental line item is providing that benefit or not. I think the other thing to bear in mind is that private market holdings are all very high maintenance, if you will. They require a lot of TLC and a lot of management, and oftentimes, what we see is that the more line items and the smaller the transactions, actually, the more work. And so, when you think about that exercise to really drill down - it just becomes all the more complicated as we go.

    That’s one thing that I would frankly suggest as you think about alpha decay on the private market side, because it’s just a bit cumbersome - the private markets, but that’s also why there’s return premium. So, the function here is how do you balance it too?

    And then thinking about gross to net, I think the key is always to focus on net. That being said, I do think that the one to two basis points that you alluded to can be kind of taken in a vacuum. The question is what is the track record? What is the supply/demand dynamic in that market? What is the edge that one has? And so, what is the distribution of outcomes, if you will? And assessing it on that basis, what we always do is think about it on a net basis - and that’s net of expenses and other things. I think that’s the right way to think about it, but I wouldn’t become too dogmatic around just the fees in and of themselves. I think the fees need to be paired with ultimately what the offering is.

    David Lomas: And as I build on that question before I kind of wrap it up, in today’s world, you talked about dry powder. We talked about the demand. What would your advice be to the audience about really checking the partners they are working with ability to source transactions?

    Pam Chan: So I think a couple things, and one is an observation around the post-COVID world, while we are all sitting kind of in remote offices and going into the office from time to time, is really about a scaled approach and where are the boots on the ground. I think that’s a really important thing to consider because in the post-COVID world, it’s going to be difficult to establish new relationships where that relationship engenders trust, and that trust results in a consummation of a transaction. That is a fundamentally human endeavor, and so, I’d say one element is really thinking about the geographic footprint. Where do the professionals sit? What communities are they in locally? I think that has become even more prevalent today than it frankly has been before.

    The other thing that I would say is, as we think about sourcing, the breadth across strategies and across cap stack. I think that’s important insofar as not just creating the top-most part of the deal funnel, but rather, assessing relative value and where we should focus the attention, because there’s always going to be opportunity cost. So that’s an element that I think is key to consider. The other thing - again, hearkening back to the main theme you opened with, is just the volatility that we’re seeing here today: important that you have, frankly, colleagues and capabilities where, if a dead investment goes awry, you have the right folks to own the equity. You have the right folks to work that out. That I think is key as we think about the three elements of sourcing and ultimately, managing those transactions.

    David Lomas: So, let me build on the theme of three and bringing this to a conclusion. As I think about the clients that I talk to, they typically fall into three camps. They’re either looking for more income, they’re looking for elevated returns on capital, and actually, during the middle of March and April, definitely looking for resilience in their portfolios, and actually, in many cases, everybody wants all three. You’ve touched on income and capital return today. But just give a sense of how you build resilience into portfolios, especially within the private asset universe?

    Pam Chan: There’s two main schools of thought both that go concurrently together. One is resilience at the asset level or at the deal level, whether that’s building in structural protections, making sure that the documents protect you when things go sideways, how you think about cash leads, etc. So, I think that’s one thing - so we park it there and it’s going to be specific to the transaction that we’re alluding to. I think the second thing, though, is thinking about it at the portfolio level - which is where I spend a lot of my brain power - thinking through both risk budgeting insofar as the exposures that we have, the quantum of those.

    We like to think about it as there are risk factors that you can control that are more idiosyncratic and tied to the underlying asset, and then there are market risk factors where, if oil prices go down to a level they’ve never seen before, frankly, I can’t do anything from my regular office or home office to prevent that, as it relates to the exposure we have in the portfolio. So then sizing it appropriately, such that you manage to certain levels of standard deviation on those market factors, is important. So, risk budget is one thing.

    The second thing is obviously trying to increase the amount of idiosyncratic risk exposure. That’s kind of the land of milk and honey, if you can optimize that.

    And then thirdly, which I think has been a useful tool as we think about constructing portfolios and what we’ve done with our clients, is really thinking about what we call parametric profit and loss, so actually testing those market factors that I just alluded to for public market trends and indicators where we see a lot more data.

    You have more real-time information to give you a sense both of direction and magnitude of any draw-down risk, but also, kind of the effect that that may have prospectively on that private market asset class that may be kind an analogy to the public market factor that you’re looking at. Those are some things that we think about at the portfolio level, but I’d say, maybe in short, the important thing is to actually have the right framework and right process to monitor these elements. And for us, technology plays a big part in that.

    David Lomas: Fantastic. Well, Pam, I could spend much longer chatting to you, and I’m sure the audience would benefit from listening to you for much longer, but our time is capped, and I just want to thank you for an awesome walkthrough of what is a very interesting and complex subject that is actually very interlinked with a lot of the topics we’ve talked about today. I think you’ve done a fantastic job helping navigate us through that market and dynamic. So, on behalf of myself, thank you so much, and thank you all for listening. Have a good day.

    Pam Chan: Thank you.

ESG e o futuro dos investimentos

Mark Wiedman, diretor da área International e de Corporate Strategy da BlackRock, e Brian Deese, líder global de Sustainable da BlackRock, debatem a abordagem e os compromissos da BlackRock com relação à sustentabilidade e investimentos sustentáveis, bem como o rumo do futuro do investimento sustentável.

  • Mark Wiedman: Hello and thank you for joining the BlackRock Investment Forum. My name is Mark Wiedman. I'm the head of International and Strategy at BlackRock and I am delighted to be joined today by my partner, Brian Deese, who runs Sustainability for the firm.

    So, what we’re going to be talking to you is a series of questions about what we’re seeing around the world and in Latin America. And let me start, Brian, by asking why does sustainability matter for our clients?

    Brian Deese: Well thanks, Mark, and thank you to all of you for joining the conversation today. Quite simply, sustainability matters because it is increasingly a core driver of long-term financial return. So, for many years there’s been a conversation about sustainability, sustainable investing, and aligning investing with values. But increasingly, the topic and the issue of sustainability is core to financial value.

    We – whether you see that in the impacts of something like climate change, the direct physical impacts, and also the impacts of the market and regulation or whether we see it through the growing focus on companies’ management of their relationship with stakeholders, be those employees or communities. These are increasingly driving value and long-term return. And so, as investors and as a fiduciary for our client, we need to be increasingly thinking about these issues integrating into what we do so that we can ultimately deliver the best long-term outcomes for our clients.

    Mark Wiedman: So, Brian, what I think about in our firm and – is that sustainability has gone from a occasional topic of conversation with clients to a frequent conversation to an almost mandatory topic that our clients bring up with us in every client segment around the world. And that says something about what’s on our clients’ minds. But it’s more than that. It’s also a view on where we see drivers of investment return long-term. Could you talk a little bit about why we see sustainability as being an investment proposition and what are the specific areas where you see the greatest need for investors to pay attention to ESG risk factors?

    Brian Deese: Yeah, absolutely. So, when we think about this from an investment standpoint, we really think about two fundamental drivers. The first is that E, S, and G risks are increasingly material to whether a company will perform over a long-term. And to be specific to your question, what do people need to pay the most attention to?

    The physical risks of climate change are accelerating. Companies, particularly that are in the or adjacent to the fossil industry, but frankly companies across the value chain need to be paying attention to whether their facilities or supply chain, their customer base are in areas that are going to be affected by everything from work stream hurricanes to flooding to the kind wildfires that we’ve seen over the West United States.

    But, we are also seeing a real focus on customers and employees demanding that their companies, the companies that they either work for or that they purchase products from are living their purpose with respect to things like inclusion and diversity of their workforce, things like having a representation in the communities that they operate in. These are growing in importance and we’re seeing that play out in terms of companies who lose that license to operate losing value very quickly.

    So, investors need to pay attention to these types of factors that are driving return. That's one big category we’ve seen in our research, that growing in financial salience. The second is that we are seeing – and, Mark, it goes to the point you were making about us hearing this from more and more clients around the world more frequently. We believe that we’re on the frontend of what we refer to as a tectonic shift in investor sentiment and investors preferencing sustainable assets and sustainable companies. This is something that’s going to play out over a long time, but we’re already seeing it today.

    We’re seeing flows into sustainable companies and sustainable strategies at record rates. And we think this is only going to continue, because of a number of factors, including that the next generation of savers in the world are those younger employees, are those younger consumers who increasingly are thinking differently about the value proposition now. And that shift, that structural shift is something that you have to pay attention to as an investor independent of what sector you operate in or independent of what geography you operate in, because if it comes to pass and we see the momentum and the interest turn into a durable shift, it will affect the values of every asset class in every geography around the world.

    Mark Wiedman: Let's talk a bit about what we’re seeing around the world in terms of clients and what they’re talking about and how that’s changing. So, could you give us a global survey of how interest is different client segments or questions that are coming around the world?

    Brian Deese: Sure. So, we start in Europe, because it’s both the area of greatest interest and also longest history with impact investing, sustainable investing, socially responsible investing. In Europe, it is table stakes in every client conversation, every interaction that you have a serious

    Mark Wiedman: What does table stakes mean?

    Brian Deese: Table stakes means if you don’t have a viable answer to how you’re integrating sustainability and to how you invest or how you operate, you might as well not even operate in the jurisdiction, that it is the price of entry to even have into a conversation, a serious conversation in Europe today. The conversation is maturing and evolving to real questions about how do you go beyond sort of static sustainable investing approaches to more ambitious efforts to try to align your portfolios, for example, with a long-term carbon transition to a net zero economy. That's where the conversation is evolving to in Europe and we’re seeing in Europe that being escalated by regulatory conversations, including central banks and governments, fiscal and monetary policy really trying to get aligned around preferencing great.

    We shift to Asia, the conversation is more dispersed, less mature, but growing very rapidly. Japan and Australia, mature jurisdictions in terms of ESG conversations. A lot of focus from the institutional sector. In other areas, including in China, it’s a newer conversation and more complex and more textured in terms of both the energy transition and societal expectations.

    You shift to the Americas, in the United States we’re seeing there some of the strongest inflows into sustainable strategies are happening in the United States today. But, obviously, the conversation is multifaceted. There are some areas of the country where there’s a lot more skepticism, a lot where it’s it feels like a European conversation. But overall, I think increasingly we’re not having conversations in the United States where sustainability isn’t some aspect of the conversation with our clients.

    And then, last but maybe most interesting is Latin America, where it’s in Latin America the conversation is newer but we have seen a very significant uptick and hunger for education, for more conversation, for more understanding of how you get started in terms of thinking about integrating ESG.

    Mark Wiedman: In Latin America, many areas it’s a less mature conversation perhaps than you would see in Northern Europe. But actually, we’re seeing some examples in Latin America of institutions that have been leaders. Can you talk a little bit about that?

    Brian Deese: Yeah. I mean, well, one, you know, there was a big moment last year in Mexico when the pension regulator moved to require ESG integration in considerations for all the ... by 2021. Has really accelerated the conversation and I remember I was on the – I was there in Mexico City back when we were traveling, and I hope we get back there very soon, just after the decision had been taken just about a year ago. And I think it’s rocket fuel to the conversation, because now all of a sudden it becomes the thing that everyone’s going to have to sort through.

    Likewise, you’ve seen a doubling in the number of institutions, both public institutions and private companies, that are PRI signature, signatories in Latin America, the Principles for Responsible Investing, a basic kind of framework for how to align your investing approach with a sustainable investing approach. We – it had been sort of bumping along up until 2018, had really taken off. So, what we’re seeing is individual institutions and companies and different Latin American companies raising their hand and saying I want to learn more, I want to figure out how to start to align my business model. And I think that that is, you know, that’s going to accelerate the conversation as well.

    The data thing is a real issue though in Latin America and one of the things we hear quite frequently is among both Latin American corporate –

    Mark Wiedman: Wait. What is the data thing? What’s the data thing?

    Brian Deese: The data thing is the data challenge, the challenge of getting good, consistent data on sustainability. As we were walking about before, we’ve seen dramatic improvements globally and certainly among large cap and midcap companies in the US and Europe. That is the, I think, one of the principle challenges for Latin American corporates is getting better data.

    But, I think the good news is the combination, the sort of positive cycle of regulation encouraging or pushing, companies finding a value proposition to their customers, and the ability to then democratize access to investments when we have enough data to actually bring products into the market. We’re starting to see that develop in Latin America and I think there’s a lot more opportunity there.

    Mark Wiedman: We’re filming today with a bunch of your kids’ pictures behind your head. We definitely wouldn’t have done that seven months ago, eight months ago. So, how is COVID changing sustainability, conversations about sustainability, the performance strategies? Is the pandemic killing off concern with climate risk? What are you hearing?

    Brian Deese: So, COVID was a big test to the two core investment convictions we were talking about earlier. One, you know, sustainability skeptics often said, look, sustainability is a nice to have when, you know, you’re in the late cycle of an economic recovery. But when the market goes down

    Mark Wiedman: A luxury.

    Brian Deese: A luxury, a nice to do. You know, great to think about sustainability, but we’re going to have to go back to our knitting once the, you know, once things get bad. We've seen since March of this year frankly double digit inflows into sustainable strategies as people were running away from the market, really striking areas like money markets where in March you saw dislocation in the US money market industry and you actually saw these outflows of traditional money markets but consistent inflows into ESG strategies over the course of the year, I think putting that principle concern to rest.

    The second concern is that ESG is nice to think about as a values proposition, but I'm still worried that it actually is going to – is actually going to drag on my financial performance. Well, COVID created a natural experiment of the, you know, largest market drawdown we’ve seen in 100 years, the most – the fastest and largest, and then a very complicated macroeconomic environment.

    Over the course of the – this year, we’ve seen really striking resilience of sustainable strategies. We've seen durable outperformance of sustainable strategies. If you look, more than 80% of sustainable industries have outperformed their apparent benchmark over the course of the year and that is actually consistent with the research that we’ve been doing for the last several years that sustainability generates resilient properties in risk off environments and that – and COVID has really proven that out.

    So, I think that, you know, in that sense COVID has been this fascinating natural experiment to help put to rest some of the principle concerns about sustainability. I think that, you know, in the same breath it also raises some really complex questions. You know, with respect to climate change, we have dramatically reduced emissions globally as a result of torquing down our economies to try to stop this virus.

    In prior financial crises and economic crises, we’ve bounced back to the status quo. Big question, you know, that is connected to the regulatory environment and otherwise about whether we’ll go back to the way things were.

    Mark Wiedman: Let's talk about the role of the state and specifically the policies that governments have been pursuing. And specifically, let’s focus on climate risk and climate change. What are you seeing around the world? And then as part of that, Brian, how does the world change in the event of a second Trump administration or a Biden administration in the United States? Give us that global view.

    Brian Deese: So, we’ve seen some very significant develops on – developments on the climate front in just the last month. So, in the past six weeks, we’ve seen the European Union increase its target for emissions reductions Union-wide from 40% emission reduction by 2030 to 55%. Very significant increase and part of the European Union’s effort to try to set higher ambition on climate across the board.

    Second and more significant is President Xi of China went to the United Nations in the third week in September and announced that the – that China was going to increase the ambition of its climate commitments, both to peak emissions, absolute emissions before 2030 and to reach carbon neutrality economy-side by 2060. This was significant for two –

    Mark Wiedman: Why is that a big deal? Why, you know, why is the Chinese – why is President Xi’s announcement a big deal?

    Brian Deese: It’s a big deal for three reasons. One is it is that China is not only increasing the ambition of its target, but it’s setting the aspiration to get to carbon neutrality, absolute carbon neutrality by 2060. Previously, China has largely talked about its goals in terms of carbon intensity, meaning, you know, reducing the intensity of every unit of GDP but not necessarily getting to zero. This target means zero.

    Second, China made this commitment alone. Previously, the conversation around China and climate has largely revolved around what can the European Union and the US do to try to encourage, cajole, or bring China forward. This is a signal that President Xi sees this as an opportunity for global leadership, particularly in light of where the United States is not stepping in, and that they’re going to act alone.

    And the third is that the commitment to peak emissions before 2030 is a near-term goal that if China wants to make good on it, they have to stop what has been a significant build in new fossil infrastructure.

    Mark Wiedman: The United States? In full disclosure, you helped negotiate and lead the US involvement in the Paris Accord, so you might have a perspective on recent policy and policy in the future. But as an analyst, Brian, how do you think our clients should look at the binary outcome of a Trump win or a Biden win for sustainable policy in the United States?

    Brian Deese: So, I think it’s stark and significant. I think in a Biden – in a Trump win scenario you would see a – I think largely the continuation of the status quo, but it would have in – what it would result in is an increasing cleavage between the United States and the rest of the world, the same dynamics we were talking about, about the European Union and China setting commitments. The next five years is going to be a race globally for countries to set increased ambition.

    In a Trump win scenario, the United States would just be off of the racetrack during that period. And so, we would see increasing cleavages as a result. I also think on the trade front that we would see increased friction around some of the technological applications, particularly with China, that are integral to these technologies.

    In a Biden win scenario, I think you have to pay attention and those inside/outside the US, this is the season you’d have to pay attention to the nuances of politics here in the US. It’ll make a big difference whether if Biden wins, he wins with a Democratic Senate or if Biden wins and he wins, and you still have a Republican Senate. The reason is because Biden is principally running on a very large public investment agenda that is oriented very green.

    If you had Biden winning and a unified Senate, you can imagine a lot of that actually happening, happening early and leading to a globally coordinated green stimulus approach across the US, Europe, and China, which I think could really pull forward a lot of this innovation and also demand for sustainable assets. In a Biden wins divided government scenario, you will still see a very significant change in regulatory posture. You’ll see a very significant change in diplomatic posture and a desire to partner, but a more significant challenge for the US to actually get back into the game, because it will be harder to pass any meaningful climate legislation through a Republican Senate.

    Mark Wiedman: What are we doing at BlackRock, Brian? So, we’ve laid out a large agenda around clients and investment theses, but what is BlackRock doing in sustainability? What are our top priorities for the next year?

    Brian Deese: Yeah, absolutely. So, I think we’re doing three basic things, right. The first is we’re trying to make sure that every element of sustainability that we understand and we can measure we are building into our risk and our investment processes in the same way that we do any other very significant factor that we think will influence long-term investing outcomes. So, what that means in practice is the tools that our investors use to build portfolios. We’re integrating what we can – wherever we can find the best data and the best ways of measuring sustainability into those processes. And we’re going to continue to do that and we’re going to continue to be both hungry and humble about our ability to measure these, but we really believe that investing upfront in the best ways of measuring, for example, fiscal climate risk or new ways of measuring whether a company is actually prioritizing employee health and safety. Those are the kinds of things that our investors are increasingly going to need if we’re going to be, look, if we’re going to be as good as we need to be for our clients.

    The second thing is we are committed to democratizing access to sustainable investing options for our clients. And this is – this has been a very significant commitment over the course of the year to increase both the scale and the types of products that we have. We’ve built – we made a commitment to launch 150 ETF products, sustainable ETF products this year. We’re well on our way to do that. We're building out active products as well, all with the idea that we want to give more and more investors the ability to go sustainable, make that easy and make it as with the grain of your basic portfolio construction investment decisions as possible.

    And the third is we’re changing the way that we approach engaging with companies where we own an equity stake on behalf of our clients. And our approach to when we sit down with companies and on behalf of those clients, on behalf of that equity stake we want to be encouraging those companies to take the actions that we as investors believe are actually going to drive long-term value. So, that means acting with regular urgency on issues like climate risk. We need to be much more transparent in making sure our clients understand that when we vote for a shareholder proposal or we vote against a director that they can understand why we took that position. And it means asking ourselves hard questions about how can we use those tools where we engage on behalf of our clients to actually produce better long-term outcomes in those companies and ultimately in the portfolios that we manage?

    Mark Wiedman: Allow me to sum up what we’ve been talking about on behalf of Brian and myself. Our investment regime is changing. Non-financial risks are becoming much more important, particularly environmental, social, and governance risks. And above all in there, we’re seeing climate risk as a palpable, touchable risk and opportunity for investors.

    We're seeing interest from clients all over the world, questions, inquiry, and now lots of demand. We’re seeing the global regulatory context changing rapidly. We’re seeing China moving quickly to seize global leadership. We're seeing the Europeans continuing to push ahead across many sectors of the economy and finance. And we face the question of which way only days from now the United States will go as to whether to be an outlier or another leader around the world in the shift to sustainability is led by government.

    Here at BlackRock, we’ve set out a goal of a trillion dollars in sustainable assets by the end of this decade. That's a huge place from where we are today. But we believe that being the leader in global investing means being the leader in global sustainable investing and that is our commitment.

    On behalf of Brian and myself and the whole team here at BlackRock, I want to thank everyone for joining us. We miss you. We desperately wish we could be with you in person. And thank you for joining this BlackRock Investment Forum. Thank you again.

Painel de debates ESG

Cindy Shimoide, diretora de Multi-Asset Portfolio e Investment Consulting para a BlackRock na América Latina, é a anfitriã de um painel que incluiu Anil Rao, diretor executivo de Equity Solutions Research da MSCI, e Sebastian Maya, diretor de Special Portfolios, Protección, Fondos de Pensiones y Cesantías na Colômbia, onde analisam as tendências de adoção dos ESG em toda a América Latina e como os investidores institucionais estão implementando soluções sustentáveis em seus portfólios.

  • Cindy Shimoide: Welcome, everyone, and thank you for joining our (practitioner) session on sustainable investing. My name is Cindy Shimoide and I lead (consulting) for Latin America. I'm really excited to host today’s panel because we have two great guest speakers and they’ll provide some perspectives on ESG investing.

    First, I'm joined by Anil Rao, Executive Director, Equity Solutions Research from MSCI. He’s talking to us from California. I'm also joined by Sebastian Maya, Director of Special Portfolios at Protección. He’s talking to us from Colombia.

    But first, let me give you an overview of our session. We just heard from Brian and Mark that 2020 has really been a defining year for sustainable investing globally. We also saw that sustainable investments experienced positive flows during the peak of COVID market volatility while non-ESG strategies saw outflows, while at the same time performance was also resilient. We saw sustainable indices outperform their market cap parent indices, not only in Q1 and Q2, but also year-to-date. And that’s why I think this trend will continue in the future and BlackRock estimates that there will be over a trillion dollars in inflows in sustainable index assets over the next decade.

    So, in light of this scenario in this session we’ll seek to answer some of those core questions that our clients have posed to us in this environment. We’ll talk about how sustainable investing’s evolving, how to invest in sustainable exposures. Another question that comes to my group at BlackRock is around data, so what data is available, what data is important. And then, we’ll also hear about the future in terms of challenges and opportunities going forward.

    Anil and Sebastian have valuable experience in dealing with these questions from both the research perspective, but also the investor side. So, with that, let me turn to Anil for my first question. Hey, Anil. On my team at BlackRock we’ve been having discussions with Latin American clients on sustainable indexing since 2017 and it’s currently most of our client conversations really. But sustainable investments we know have existed for decades. Can you speak to us a little bit on the broad landscape and how sustainable investing is evolving?

    Anil Rao: Sure. Thank you, Cindy, and thank you for the opportunity to speak today to BlackRock and to Protección for partnering on this session. I would maybe first start with my comments just by noting that 2020 is a notable year for sustainable investing in that it marks the 30 year anniversary of one of the first socially responsible indexes and this was called the KLD 400 Social Index and it launched in 1990. So, if we can dial back the clock, in 1990 there was this one index targeting socially conscious investors. Its index construction was largely committee-based and there were zero ESG oriented ETFs.

    So, let’s fast forward 30 years to 2020 and just at MSCI there are around 1,500 ESG oriented indexes that now target mainstream investors. The index construction is largely rules-based rather than committee-based and there around 270 ESG oriented ETFs. The dominant issues 30 years ago for socially conscious investors were largely focused on topics such as human rights or pollution and the idea, the idea that there could be a link between say ESG and financial performance was not readily accepted.

    Again, fast forward 30 years. Today, there is a wide array of key issues across environmental, across social, across governance themes and those themes are specific to the industries that the firms compete in. And importantly, there’s a growing body of empirical research now on the link, this critical link between firm level ESG characteristics and a firm’s financial metrics, whether they be cash flows or valuation or tail risk.

    Another key difference I would note between 1990, now in 2020, is the ascendancy of climate. And I say this from my home in Northern California, which unfortunately is already seeing some of the effects of changed weather patterns. Investors in 1990 considered a limited set of issues around climate, be it pollution or ozone depleting chemicals, or they were more reactive to events such as the Exxon Valdez oil spill. Today, there’s more of a focus on building kind of holistic climate resilient portfolios and that goes beyond single issues. That encompasses risk reporting, portfolio construction, and asset allocation.

    Cindy Shimoide: Thank you, Anil. I asked you about the evolution of sustainable investing, but it really feels like a revolution, right, in data, in process, and investor interest, too. Do you think you can give to us some more insight into how your clients have been adopting and integrating sustainability into their investment processes? What do you think maybe are the main motivations for investing sustainably?

    Anil Rao: Sure. And thanks again for the question. I would start by saying for clients one motivation, and we touched on this earlier, one motivation is the evolution from incorporating values to incorporating financial materiality. So, our own research recently has shown that there is a link between the rating or the profile of a firm and its profitability, its discount rate that investors apply to the firm, and the likelihood of a large loss in share price.

    So, given all that, we can look at a few members of the financial ecosystem and consider how sustainability is getting used and I would start with asset managers, for example. Okay. So, asset managers use firm level ESG profiles as, one, a tool for engagement and they also use it as an input, a signal into portfolio construction. So, this could cover fundamental and quantitative equity strategies or increasingly fixed income strategies.

    On the other hand, large consultants, investment consultants, are incorporating ESG and sustainability dimensions into manager due diligence and selection. For asset owners, there is a growing demand, for example, for active and indexed ESG strategies and the risk teams within those asset owners are increasingly reporting systemically – systematically on ESG and carbon exposure across the total portfolio.

    So, maybe let me just speak to one of the use cases here and that’s the case for indexed equity. And I think allocators are looking for index solutions that complement rather than substitute their allocations to active management. So, what I mean by that is there’s a spectrum that really spans three types of portfolios. One, a portfolio could account for values and norms-based screens, for example weapons or tobacco screens, similar to what we’re seeing in the wealth management space. Two, another type of portfolio would be more concentrated along the lines of like an impact investing portfolio that addresses a sustainable development goal. And three are broad market portfolios that really preserve the risk profile of a wider opportunity set but that integrate an ESG signal into the index construction.

    So, you can think of these as three types of portfolios that span an active risk tolerance from low active risk broad market portfolios to higher active risk more concentrated impact portfolios. I hope that’s helpful.

    What Anil said I think really showcases how adopting an ESG focus or ESG strategy for investments, it’s so much more than just trying to accelerate a social or environmental role. I think that incorporating ESG risks means taking that deeper look into that non-financial exposure of companies that in the end affect returns, which is great, because it also serves me as a transition to ask Sebastian about Protección’s really pioneering journey towards adopting ESG strategies in Colombia. Sebastian, please can you tell us about how you and your team started exploring investments in ESG strategies and what were the key decision points that you faced?

    SEbastian Maya: Yeah. Thank you, Cindy, and it’s a pleasure to be here with you today. Actually, in Protección sustainability has been a major principle in our firm, not only in the investment analysis we do, but also in the risk analysis. But this year, Protección became the first AFB in the Colombian market to become a part of PRI. So, we’ve been, during this year we’ve been transforming our investment process and also transforming the products that we offer to our clients to be more specific about incorporating or about, sorry, about having ESG principles as a core offer to our clients.

    So, we began transforming some of our portfolios that we offer to our clients and in that journey we’ve been discussing the best way to incorporate all the developments that the financial markets have done in the past few years to create products that target specific ESG criteria. And it’s been really wonderful to see how our clients embrace that ESG principles and are really comfortable having that in their own portfolios.

    Cindy Shimoide: Thank you, Sebastian. Interesting to hear about your view on performance of sustainable investing as well. Was it part of your decision or what about risk management?

    SEbastian Maya: Performance and risk management in ESG products are something that are hand to hand and really important. Given that recently ESG products have really performed really well, it’s something that our clients have benefited from but was not the primary issue for us. We believe that incorporating ESG principles is a good practice to incorporate in the asset management industry and as asset owners I think is responsible and it’s important for us to incorporate all those G – ESG principles in our analysis and in our investment process.

    Cindy Shimoide: Thank you, Sebastian. I think that your comments are really important on performance to the audience today. But I also want to reiterate that the index strategies that you invested aren’t just screening out companies. They are also optimizing exposures, right, in order to balance tracking error and ESG scoring.

    But, Anil, with that let me turn back to you. This year we’ve been incredible volatility in the financial markets, but we also saw sustainable indices outperforming. Broadly, if we look at first quarter when all the heightened volatility came, BlackRock calculated that over 90% of sustainable indices outperformed their parent market cap weighted benchmarks. Do you think you can speak to us about what the drivers of performance were, and do you expect that performance to last?

    Anil Rao: Sure. You’re right. 2020 was really marked by extraordinary events. And as you mentioned, Cindy, one upshot has been the performance of many ESG indexes, particularly in equity. So, returns will vary, of course, across index type. One widely used index type is one that uses, as you mentioned, optimization to, for example, increase an overall ESG score, a portfolio level score, while mitigating secondary effects from, say, countries or currencies.

    We call this a focus index or an ESG focus index and it has outperformed the broad market in both developed and emerging markets by over 1% year-to-date with relatively little tracking error. On the other hand, the more concentrated type of ESG index, so one that takes more concentrated bets within sectors, a best-in-class approach if you will, has done particularly well in emerging markets this year. So, that’s up almost 5% against the broad market MSCI Emerging Markets. And that’s true even with Latin America as well.

    Latin American equity markets, of course, have really plunged in 2020, led of course by Brazil. But a Latin America ESG index has outperformed by around 1% in dollar terms as well. And climate-oriented indexes have fared even better in 2020. More on that to come.

    But I think one natural question, as you mentioned, Cindy, is, well, what is driving this outperformance. And I think a narrative in the marketplace is, well, because, for example, crude oil prices are down 40% this year and many ESG indexes might have an underweight to the energy sector. Isn’t most of the outperformance just due to that sector effect? Or another common narrative is isn’t ESG just doubling up on other firm characteristics, such as high-quality firms or low risk firms? And the answer, as always, well, it depends. It depends on the type of index and how granular can we get in decomposing sources of return.

    So, one innovation that we’ve been working on, we’ve recently built a risk model that facilitates isolating just the ESG component of return. So that is, we can look at that component of return outside of sector or country or currency effects that could be confounding the result. And we found that in the optimized type of index, the focus index that we described earlier, most of the outperformance this year is in fact due to that ESG component, not due to other sources. And even in the more concentrated best-in-class approach that we described earlier, and that's an approach that might underweight large or resource extractive firms, but we found that that ESG only component of return is non-trivial and it rivals the other sources of return as well.

    So, just to go back to your question on what can we expect this year, I won’t speculate on if this performance will last. But I can comment on what we have seen and the ESG factor, that same factor that we described earlier, well, that had been dormant from around 2015 to 2000, sorry, 2005 to 2016, so over ten years. Since 2016 it’s been on the upswing.

    One other theme that we’re exploring is related to climate and that is this notion of a green to brown premium. That is our investors, there appears to be evidence that investors over the last few years, they are penalizing those firms that have the majority of their revenues from oil and gas exploration or thermal coal mining or fossil fuel power generation.

    Cindy Shimoide: Thank you, Anil. I’ll transition to ask one more final question to each one of you. But, Sebastian, let me start with you. What are your plans for the future with regards to ESG investing and do you see ESG risk analysis being incorporated into your other investment processes? And if you can talk also about index solutions.

    SEbastian Maya: Sure. Definitely ESG principles are here to stay in our firm and in our investment process. So, definitely we’ll continue to incorporate even more those principles in every and each analysis that we do. But, our path for the following months continues to transform our base products into ESG compatible solutions to our clients. We began that journey with international equity. We expect to move to multi asset strategies and also our EM and emerging markets exposure also to begin that transformation to ESG compatible strategies. And in that regard, ETFs and all products that give us exposure to these markets that are built to meet ESG criteria are going to be the building blocks of our portfolios. So, we are really hoping that this trend that began in the developed world continues and also gives us a diversified approach to build our portfolios in emerging markets, building or incorporating those ESG criteria.

    Cindy Shimoide: Anil, let me go to you. Given Sebastian’s comments, what’s next for sustainable index in Latin America? How do you think that sustainable indexing will evolve going forward?

    Anil Rao: Sure. So, I think, Cindy, the emerging markets in Latin America do present unique challenges. And so, what does the data tell us? The data tells us that firms in the emerging markets tend to have a lower ESG rating on average than their developed market counterparts. There's also a wider dispersion and some of the key reasons behind these lower ratings are due to, for example, corporate governance, labor practices, and corruption. Okay. And this is particularly true in Latin America where over 30% of firms are what we call ESG laggards or relatively lowly rated and that in – stands in comparison to around 6% of firms that have that characteristic in developed markets.

    But we also know in Latin America that the regulatory push for sustainable investing is strong. Now, we just take, for example, the pension system in Mexico and we’ll about that in just a second. But, one other reason for the optimism around Latin America is that the returns for sustainable investing are most attractive within the emerging markets.

    So, to go back to Mexico and I think it’s a good example of how local pensions and the regulators pushed MSCI and also pushed BlackRock for an ESG-oriented option. And it’s an example, Mexico is an example of a difficult market in that it’s thin. There’s around 24 stocks in the large and midcap space. It tends to be concentrated at the top with a very few number of stocks that have a large weight and there are few – there are a few large firms with a relatively poor ESG profile. So, all of these pose challenges in constructing an index.

    In this case, in Mexico we used both norms-based screens and optimization to handle those competing constraints. And I would just add here that while one index methodology doesn’t fit all countries, there could be an appetite for this similar type of approach in other countries within Latin America.

    Cindy Shimoide: Thank you. Let me summarize what we’ve talked about today. But first, I want to thank both Sebastian and Anil for their partnership, not only today but throughout this sustainable journey.

    And we’ve covered several things today. First, the demand for sustainable solutions continues to grow. We talked about investor interest, but also actual inflows. Second, the sustainable ecosystem has really evolved for the better. So, barriers that we saw in the past to implementation have really reduced. Data availability and transparency have grown massively and the ... has increased, even in our own Latin American region. We also saw the importance of value of ESG considerations into your risk management process.

    But lastly just to finish, at BlackRock we work here directly with clients to better understand and assist you in the integration of ESG into your portfolio construction and to do so we leverage the data that our partners at MSCI provide to help you navigate this transition to sustainable investing. If you're interested in learning more, please do reach out to your relationship manager and I’ll be super glad to follow-up with you. Thank you, everyone, and have a great day.

A integração ESG para os gestores de ativos

Meaghan Muldoon, líder global de ESG Integration da BlackRock, e Helen Jewell, diretora global de Research for Fundamental Equities da BlackRock, analisam como a integração dos ESG se soma aos processos de investimento da BlackRock e aos investidores no contexto histórico da integração dos ESG.

  • Meaghan Muldoon: Hello, everyone. I'm Meaghan Muldoon and I'm the global head of ESG integration at BlackRock. I'm very excited to be a part of the discussion on sustainability today. I think this conversation’s happening at exactly the right moment. Through our conversations with clients, we’ve observed that sustainability is consistently becoming a theme of focus in Latin America in a way that’s really different than what we’ve observed even last year. As you heard from Brian and Mark earlier, the momentum is only going to build as we move into 2021 and beyond.

    BlackRock has articulated our investment conviction that climate risk and sustainability risk are investment risk and that’s why we’ve put sustainability at the center of our investment process. Now, just like there’s not a single approach to generating alpha in portfolios, there’s not a single approach to ESG integration. So, today we’d like to walk you through a little bit of history of how ESG integration has evolved, how BlackRock has tackled it, and why we believe it’s increasingly important as a tool as we go forward.

    I'm very excited to be joined today by my good friend and colleague, Helen Jewell, who leads research for BlackRock’s Active Investment teams and has been a key partner of mine in helping to implement our ESG integration through our investment teams, including the analysis and risk of ESG in the investment process. Helen is an expert practitioner of ESG integration and throughout this conversation I'm going to be looking to her to bring a unique perspective on the challenges she’s faced and also the opportunities her teams have found as a result of taking sustainability into account.

    So, Helen, with that as a very prolonged introduction, why don’t we start with some point of view from you on how ESG integration is being used in your teams, but also how ESG integration’s evolved over your career as an investor.

    Helen Jewell: Yeah. Thank you, Meaghan. And hello to everyone. I hope everyone’s families are doing well. I think the first thing to always remember is that ESG risk assessment has always been part of any fundamental analysis. And I always look to the utility sector and in the utility space it was so important to understand what the carbon output costs of a company were going to be and to get comfortable with a company’s management. It’s one of the key reasons we would always meet with corporates.

    However, what has happened, especially more recently is that we’re seeing ESG being more systematically integrated into investment processes. I think there are two key reasons for this. The first thing I think is that the amount of data available, both from the companies themselves and from third party providers that provide insights into a company’s ESG positions, companies like MSCI and Sustainalytics. The data from companies is becoming much more robust, and then, there are initiatives such as SUSBA, which are helping to move this along by creating a framework that companies can follow. In addition, we have data not just from the company itself, but we’re able to scrape things like Glassdoor data, alternative data to try and assess how employees in an organization are feeling.

    The one thing I would say is that data is so important in any kind of research and analytical insights, because it gives you insight into how companies are performing through any kind of perspective and in a nonfinancial perspective we’re utilizing data more and more. So, that’s the first reason, the data.

    Now the second thing, of course, that matters is that regulators and clients and consumers are really focusing on this. And when it comes to the increased regulatory focus on sustainability and climate change, what that means is that we as investors have to take that into account when we’re looking at the fundamentals of our business. It changes the cost of capital. It changes the required returns. And therefore, when we are looking at a sector, let's say for example we’re looking at the traditional energy companies, we apply a higher cost of capital to allow for potentially potential regulatory impact. In addition, for those kind of companies we apply a lower, typically a zero, terminal value to reflect the long-term decline in fossil fuel demand that we foresee.

    So, the process has evolved dramatically. Before, we as fundamental analysts would have to work with incomplete datasets and inconsistent disclosure. But now, with systematic processes we can really uncover those risks and generate value across all of our portfolios. And ultimately, to be honest, Meaghan, you know, as analysts, why wouldn't I want to look at data that could be relevant and give me insights into the company?

    But although I'm very, very focused on bottom-up, I'd love to understand more about the work that you do, because you look very holistically across BlackRock. You look at how we think about integration across all of our portfolios and across the entire organization. I'd love to understand more about how that has evolved across BlackRock, because it’s something I feel incredibly proud of.

    Meaghan Muldoon: Thank you for that. It’s no wonder why I enjoy working with you so much. I think the passion for what you bring into the investment, to the asset class is just awesome and I think indicative of what we’re seeing really across the organization. So, the, I think the sentence that my colleagues have heard me say over and over again is the definition of ESG integration. When we’re thinking about integration, we’re looking at the incorporation of material environmental, social, and governance considerations alongside traditional financial considerations to drive risk adjusted return. This means we aren’t changing portfolio objectives. In my mind, ESG integration is actually the purest execution of our approach to putting sustainability at the center of our investment process at BlackRock. If we believe investment risk, sustainability risk and climate risk are investment risk, then we should be applying that philosophy across our full product spectrum, not just products that have a sustainable objective in and of themselves.

    So, our approach to ESG integration is increasingly also we find a criteria, Helen as you mentioned, our clients are using to select their asset management partner. So, we’ve had I think a strong embrace from our investment teams, both thinking about the performance lens and also the commercial lens of why these considerations are important.

    I think also just importantly, coming back to the investment thesis, it is our conviction that is driving our approach. We’ve committed to ESG integration across our full active platform. When we think about what that means at BlackRock, it’s really kind of work and execution across three areas of engagement. The first is the investment process itself.

    So, we’ve put in place a structure that is consistent across all investment teams that ensures that we’re considering exposure to ESG risk and opportunities across all active strategies and portfolios, kind of with rigor and with a consistent framework. But we’re, again, allowing for differentiation in execution across different investment teams.

    The second piece is a transparent investment framework. So, we want to make sure that we’re being very clear with each other and that we can document clearly for our clients how and when in the investment process these kinds of sustainability considerations are coming to bear.

    And then finally, and I think this is really the crux of it, it’s the material insights. We’re trying to develop at BlackRock an investment culture where our investors are both using and generating material sustainable insights to drive investment conviction. And Helen, I know that that is, that piece right there is speaking your language. I think two core pieces of our thesis just from a price and valuation perspective. I think we have kind of a key hypothesis that a range of these environmental, social, and governance considerations are not currently fully priced into markets and, therefore, we can use this lens to find new sources of value.

    00:11:36

    Helen Jewell: No. I think that’s incredibly important. I mean it’s worth noting that we’re seeing an increase in the amount of a value of a company that is in its intangible assets. I mean over 80% of the S&P 500 is now intangibles and that really has to change how we think about the duration of a company’s earnings. Duration of earnings is absolutely critical for us as investors and if we’re going to have a look at the duration of a company’s returns, we need to think about what are the things that are going to potentially impact on those intangibles.

    So, whereas previously if you had an asset and it was, you know, creating your products, it’s pretty straightforward. When you’ve got intangibles, things like you say, reputational risk can really impact the goodwill, can impact customer relations, it can impact the workforce and all of these are things that will have a long-term impact on the financials of a company.

    So, this increase in intangibles means that the impact of that ESG lens that you’ve just talked about is increasingly important as how we think about this. And so, what we’re doing is we’re creating tools to really help our investors identify where a particular company has got exposure to those risks and then it’s up to the skill of the investor to do the deep dive, to look at the risk, to assess how much they think it really does impact the valuation, to speak to the corporate, and to ask the right questions, you know, how are you reacting to these things. And I think that is a really, really important change that we’ve had.

    And of course, we can’t have this conversation at this point in time without talking about the changes of the last six months, because what we’ve seen is as a result of everything that’s happened with COVID-19, a real acceleration in particularly the social and the governance aspects of all of the work that we’re doing. I mean it really has accelerated this where people suddenly are thinking this really matters to the way that corporates are thinking.

     

    So, Meaghan, could you elaborate a little bit more on the way that the COVID-19 crisis has impacted the way that you guys in BSI think about ESG research?

    Meaghan Muldoon: Yeah, absolutely, Helen. And this has been, as you well know, I think a really cool and interesting area of work over the course of the last six months. I think just like we looked at 2019 as a real bellwether year in the understanding of the relevance and importance of climate change, I think we’re going to look at 2020 as the year where we saw a real pivot in the consideration of not just environmental issues, but environmental, social, and governance issues alongside each other as a broader structure.

    If you think about the tremendous toll that the COVID-19 crisis has taken on us, on health, on economic wellbeing, on everyday activity, it really has precipitated widespread reassessment of the way that we live our lives and this is consistent into the frames that we bring into our investment approaches as well. We’ve focused on a range of considerations on how BlackRock can identify material risks from ESG data to improve our investment processes. I think the COVID-19 global crisis has provided a unique environment for us to evaluate what is and what isn’t material and also to help us understand our understanding of materiality as an evolving concept. And it’s also given us new data and information that has changed our views on how we think about that materiality.

    So, just as a little bit of kind of evidences of some of the works that we’ve done over the course of 2020, in mid-April, which is really, as you remember, right in the middle of the market crisis at the beginning of the COVID crisis, we did an internal survey of our internal investment professionals and we found that over two-thirds of the respondents said that they believed COVID-19 would make ESG related factors more financially relevant as we went forward when they’re assessing a firm’s bottom line and a firm’s ability to provide sustainable value, even in the short-term. And I think this is an important observation because this was really the first significant market crisis since sustainable investing has gone mainstream and I think a lot of market observers would've gone into this crisis thinking when something like this happens in the market sustainable investing is going to go by the wayside. But what we saw was actually quite the opposite.

    So, what’s the proof of this? Our research found that across 15 key sustainability themes that we have tracked as an organization for, you know, several years at this point, the strongest relationship to short-term performance during the COVID period, during that quarter one timeframe specifically, were found in customer relations, which is S considerations, firm culture, another S consideration, and board effectiveness, which is a G consideration. I think this provides some strong evidence that S and G factors have a strong materiality and, again, this means those metrics were the most associated with performance during that period of time.

    So, in essence, COVID has led an acceleration on the focus of not just E, but E and S and G together. I think what this means over the long-term is something that we’re still contemplating. And as I said, I think this helped us to understand evolving concept of materiality. But we’ve done a bunch of work and, Helen, we did a little bit of this work together in thinking through how we view COVID-19 affecting integration and how we assess companies specifically going forward.

    And then finally, I think that the primary drivers underpinning climate change and sustainability we recognize aren’t going anywhere, that this shift playing out is really a long structural shift that’ll operate over many years and there’s kind of a very long-term generational consideration in how I think about climate change but the actions that we need to take to avert climate change and these big black swan kind of considerations are things that have to be taken today. The experience of the global health pandemic has also made these slow catastrophic consequences of climate change, deforestation, and other once abstract threats really much easier to imagine and I think that’s increased the salience with not just in our investment teams within BlackRock, but also how our clients and other stakeholders are thinking about these considerations. Does that resonate with your experience?

    Helen Jewell: No, absolutely agree 100%. I mean I think the key there that you talked about is this point about how it really has transitioned from this values to value point. And I think you’re right. So many people thought the market will go down and everybody who just kind of were doing this because they thought it was the right thing to do will kind of leave the boat. And what people hadn't realized is that the companies that score well were well-positioned companies. They were well-governed companies. They had strong sustainable cash flows. They had customer relationships that were able to sustain through the period that we’ve just seen, that they were companies that looked after their human capital and the human capital responded to that.

    00:24:18

    And so, if anything has pointed toward the fact that this is not about values, it’s about value, it’s everything we’ve just seen. We’ve absolutely seen it roll out in action. And just as you say, it’s exactly why BlackRock has made ESG integration one of the key and one of the key pillars of its strategy around sustainable investing, you know, stewardship and product development, like you say, being the others. Every single dollar we manage needs to have sustainability at its focus, because this is the reallocation of capital that is just going to transform the investment ecosystem.

    00:24:56

    One thing I would note conscious of kind of obviously the region we’re talking in is that in Latin America we do need to be conscious of the fact that the data can be incomplete. So, it’s that data journey I was talking about right at the start. It is a little bit further, you know, in the region it’s not quite as kind of established as it perhaps is in the other regions.

    00:25:19

    Then really from our point of view as fundamental investors, this is actually an opportunity. You know, our GEMs team has spent a huge amount of their time understanding, you know, what really is going on from an ESG perspective. You know, the absence of data is not a problem to them. They might need to get to know the companies a little bit better, spend that little bit of extra time really deciphering the data that is available, but they still see it as a huge investment opportunity.

    Having said that, I would expect over the next kind of one, two, three years that we will see companies in this region evolve, disclose more data, and really take advantage of this reallocation of capital by making sure that they are opening themselves up to investors who really do need a certain amount of data in this space. So, yeah, LatAm has perhaps not yet adopted ESG integration to the same extent as perhaps European investors who have always been very, very considerate of this and American investors to an extent as well. But I think you and I have talked about this before, Meaghan. I know that we both really see that this year has been a real inflection point for that as well.

    Meaghan Muldoon: Yes. I think exactly. The same core drivers that we’re seeing playing out on the global stage are the same drivers that we’re seeing play out in the Latin American region now. And I think just going to what those key drivers are, one, exactly as you said, it’s the data. Having better data allows for a better opportunity to make differentiation and make investment decisions. But I think two is the shifting regulatory framework and, three, as we said before, it’s really this consumer preferences and a desire for end investors to understand what’s in their portfolios and make sure that that is a reflection of what they want to be allocating their own dollars to.

    Both of these are becoming kind of clear themes in the Latin American market as well. I think really interestingly I know there was a movement in Mexico I think coming to bear in 2021 that’s going to require pensions to be thinking about the integration of ESG risks in portfolios under management. This is very similar to what we saw in the UK only a year ago where there was a same approach that was taken. I think this is probably the first of several steps that will be shifting requirements for asset owners to be thinking about these kinds of considerations and more structured approaches.

    And then, second, the end investor preferences. We’ve seen a significant uptick in participation in the PRI, the Principles for Responsible Investing, that I think is a really strong leading indicator for understanding how seriously different kinds of asset owners and asset managers are taking these kinds of considerations in the market. That, paired with the kinds of conversations we’ve been having with clients over the last six months, year, 18 months, I think we're really seeing a bit of a turning point and I think this is really reflective of the pattern that we’ve observed in other regions as well.

     

    But, Helen, I think it’s been incredibly exciting to have this conversation with you to look at this both from a top-down and a bottoms-up perspective. But I think my key takeaway here is that this really is a important moment for our Latin American investors to have the opportunity to help to define what these concepts, what does ESG integration mean in the context of your market, what does the concept of materiality mean, how do we think about these, whether it’s a data challenge or a data opportunity in the region. And we’re looking forward to working with you as you go on this journey together. Thank you so much.

    Helen Jewell: Absolutely. It’s absolutely huge opportunity for the region and incredibly exciting. Great to speak with you, Meaghan. Thanks, everyone, for their time.

    Meaghan Muldoon: Thanks, Helen. Thank you.

Navegando com um propósito

Rob Kapito, cofundador, presidente e diretor da BlackRock, conversa com Frank Cooper, diretor de marketing da BlackRock, sobre o papel do propósito e a importância de manifestar uma cultura baseada em valores. Outros destaques incluem debates sobre a evolução dos princípios da BlackRock desde a fundação da empresa, os efeitos duradouros da crise da COVID-19 nas expectativas dos clientes sobre como as empresas vivem o seu propósito e o papel da cultura corporativa no empoderamento das futuras gerações de líderes.

  •  

    Frank Cooper: Good afternoon, everyone, and hello, Rob. Great to see you.

    Rob Kapito: Great to be with you all today.

    Frank Cooper: I’m excited about having this conversation with you about purpose. You know, there’s a lot of conversation happening, and I think, confusion, about the role of purpose within companies and how companies can actually live out their purpose. But, before we jump in, I want to start with this, because we were having this conversation earlier. We’re at the LatAm conference virtually, and you’ve said this many times before - this is one of your favorite conferences, period, without qualification. And I'm just curious why you love this conference so much.

    Rob Kapito: Well, this is my favorite conference and it’s about the people. And I find that the people that attend our LatAm conference are always optimistic and have a can-do attitude. And I’ve been able to be very candid, share our thoughts and concerns, and I know that all of the people at the LatAm conference over the years really feel a strong partnership with BlackRock, as much as I feel with all of them.

    Frank Cooper: That's great. You know, I miss it. I've done it for the past four years. Hopefully, we’ll have a chance once we get past the pandemic to see each other in person next year. But, let’s jump into this conversation, because I know we don’t have a lot of time here, and this is such a rich conversation.

    A lot of talk about purpose and I find that most leaders struggle with how do I make this real, how do I live purpose? And from my perspective, it starts with inside the company and it starts with culture. And you talk a lot about culture. And so, I'm really curious about how you think about a values driven culture, and how that benefits the company overall? And then, the role that purpose, standing for something bigger than someone’s self, the way purpose actually plays out within companies, a company’s culture.

    Rob Kapito: Well, purpose is at the heart of who you are and what you do, and culture is built on that. It sounds self-serving, but at BlackRock, it’s always been about putting our clients first. And, of course, now, we talk about it in a way of helping more and more people experience financial well-being. But, that’s not a new concept. It’s always been our purpose and we deliver it through keeping our promises on performance.

    It started for us in fixed income, because that’s where we could generate income for our clients. Then we added cash, then equities, then alternatives. And every time we add or build something new, it’s because we’re responding to issues that clients are facing. So, we try to develop appropriate solutions and then keep our promises to our clients by delivering on performance. All our employees, they all know that this is what we do, and you often hear me say, “if our clients do well, then we will do well.” So, we’re living that out. Two of our four BlackRock principles directly address our purpose, and every single employee could tell you what they are. They’re passionate about performance and they are a fiduciary to our clients.

    And if a leader is struggling to identify or realign with their purpose, my advice would be to take it back to the basics. Sometimes the water gets muddy and it’s hard to see the bottom. So, ask yourself - why did you start doing whatever it is that you do, and what kind of impact does that have? And then, Frank, you build from there.

    Frank Cooper: And Rob, how do you think then some companies lose their way? So, if you go all the way back to the beginning when you guys were co-founding BlackRock, you know, 32 years ago, and I'm curious how you – at that moment in time it’s about survival, right. It’s like, hey, you know, we need to survive. You get to a certain point, you realize, and you discover your purpose. But, it’s easy to lose purpose if you don’t have a strong culture.

    I'm just curious how you think about the way in which companies, and BlackRock, in particular, can hold on to the values that are within the company, how you maintain that as you grow?

    Rob Kapito: Well, you have to constantly add value. Otherwise, why are people interested in talking to you? But, it’s really a top-down and it’s a bottom-up approach. Sometimes, I manage out of using guilt, Irish guilt, Catholic guilt, Jewish guilt, Latin American guilt. It’s all the same! You know, when your spouse says I'm mad at you, you don’t really care. But when they say I'm disappointed in you, that really hurts. So, the leaders at BlackRock know what I expect of them and when they don’t deliver that, I hold them accountable and this accountability trickles down because you never want to let your colleagues down. So, we are all counting on each other, building this and working for our clients together, and no one wants to ruin that.

    And from the bottom-up, every single new hire, whether they join through the graduate program or 20 years into their career, spends significant time in their early days at the firm learning about our purpose, our principles, our culture, not just reading it in an employee handbook, but engaging with peers and experiencing what it means firsthand. So, this is not a set-it-and-forget-it kind of thing. We must constantly be reinforcing the culture and leading by example.

    Every day, I think about what kind of message my actions send to employees and others do the same. And a few years ago, one of our employees lost a close family member and when I thought I was unique in driving to that employee’s house to offer my condolences, I opened the door and found a dozen other BlackRock employees already there. That's the BlackRock family. That's what we do. They’re accountable in many, many ways and they live the BlackRock principles.

    Frank Cooper: That's so true. And, you know, I’ll tell you it was one of the things that I noticed coming into BlackRock over four years ago is that it’s not just words on the wall. People actually live it. And it’s a precious thing that you have to protect along the way.

    I want to shift gears for a second here and talk about the changing world. And, you know, anyone who did not believe that we live in an accelerating world, 2020 has made them a believer, right. We are seeing a global pandemic with COVID-19. We’re seeing, you know, protests across the world for equality and equity. We’re seeing populism and nationalism rise up. There's an outcry that’s rooted in kind of these rapid disruptive changes that we’re experiencing.

    I'm curious how you think about this transition as we transition to a new normal. How do you think clients’ expectations of BlackRock and companies in general will shift in light of these kind of cataclysms that we’ve been experiencing in 2020 and even before?

    Rob Kapito: Well, first of all, we need everybody to be safe, so we can come out the other side and actually do something about many of the issues that have been facing the global community for many, many years. So, I hope that all of you in the audience are thinking about being safe as the number one priority and keeping your family safe.

    But look, there is always going to be people in life looking, waiting, for you as a leader to do something wrong or to point fingers. And the more successful we all become, the bigger the target is on our back. But we cannot afford to let that distract us from where we are headed and what is most important. You know, many people latch onto this idea that big is bad. But they forget that big also means resources and opportunities to have a stronger voice and be a force for good. It allows us to engage in communities around the globe, opening doors for dialogue with nearly every government and policymaker. Scale and access are actually key to being able to help make change.

    Let me also remind you that while $7 trillion sounds like a large number, and it is, those are not our assets. They belong to our clients. So while BlackRock certainly has a seat at the table when it comes to engaging with companies around the around the globe on their actions and policies through proxy voting and conversations, ultimately, it’s our clients’ money. Everyone wants me to make a statement with your money and it doesn’t work that way. That said, from a corporate standpoint, we are committed to standing up for what we believe is right and using our voice for change. And it just isn’t always as easy as the skeptics might think.

    Frank Cooper: Absolutely right. So if you think about the lasting effects of this crisis - and there are many, so, you know, pick one or two – [..] from working remotely to purpose-driven companies. But, what do you think will be the lasting effects of this current global crisis on how firms operate?

    Rob Kapito: Well, I think it’s going to be difficult to find the new normal. You know, we want things to go back to what we were successful with and go back to the treadmill that we may have been on. That's not going to happen. And technology has really driven us in that way. The pandemic just forced what might’ve happened two or three years from now to happen quicker.

    So, it’s going to be very hard for all of us to strike a new balance. We think and plan long-term, because ultimately, that’s the best for our clients. But you know what? We’re evaluated by all of you quarterly. And if you look at politicians, they have the same problem, and they’re evaluated every day.

    So, as a public company, everybody looks at my quarterly earnings but wants me to focus on the long-term. So, there’s a mismatch that somehow we have to find the balance for. And I know all of you in the audience evaluate me daily on what your returns are and if I am keeping my promises with every move in the market. And we accept that responsibility. But we continue, and I believe you should too, to clearly articulate your long-term strategy and we will articulate our long-term strategy and plans to our clients and to our shareholders over the many years that we will continue to operate as a public company. And as long as we’re consistent, I hope that everyone will look at all of us on keeping our promises over the long-term and not let short-term evaluation tempt us into being nearsighted.

    So, we value our relationship with all of you as a long-term partnership. There’ll be times when we can help you to provide good long-term solutions and there are times that we’re just going to sit back and support each other and work together to make sure that all of our clients have a bright financial future.

    Frank Cooper: That's great.

    Rob Kapito: So, Frank, how about if I ask you a question? You’ve worked in a series of different industries throughout your professional career and I'd love to know, what are the inconsistencies or consistencies about purpose that you’ve noticed across the very different industries that you’ve worked for?

    Frank Cooper: Yes, I’ve had a chance to work across a variety of industries, technology, you know, consumer package goods, [..] media and entertainment. And what I saw was that there is an evolution of core purpose. So, there was philanthropy and cause marketing. That was more like benevolence on the side. It really didn’t go to the core operating model of the company. It was helpful. It was necessary. It met the humanitarian needs that were in society. But it was the first step.

    Then the second step I saw was the CSR movement, you know, corporate social responsibility. That brought it closer into the operating model of the company. But it really was looking at the externalities of the company, the supply chain, and the impact that would have on various communities and companies tried to mitigate that under this banner of corporate social responsibility, being a good citizen in the world.

    This next phase though, purpose, went deeper than all that. And I started to see this across virtually every industry and it was this idea that what we do is important, how we do it and the values that we express are important about why we exist in the world. And I first saw it with brands and, you know, I love brands and I’ve worked for big brands before. But I can tell you, people increasingly don’t care about brands unless it speaks to their values, unless they feel like it helps them with their personal and collective identity, unless it’s advancing and adding value to their life. And the thing they were asking was: does the brand express something that indicates that it’s helping people, helping human beings, helping society? And so, brand became more of an expression of purpose. The communities in which we operate were asking a question, how do you help the community? And this purpose movement was born.

    But here’s the thing that struck me more than anything else, and I see this across virtually every industry. The best talent, they want to work for companies that have this sense of purpose. The best talent, they still want the money, so we can’t [..] push out there that, oh, we can pay them less. No. That's not the case. They still want money. They want the status, but they also want to feel like they’re contributing to something bigger than themselves.

    And Rob, I see that across every industry and in every interview that I had, that I’ve had in the past couple years with anyone coming into the firm, they’re asking that question in a variety of ways. But they want to know what does the firm do to help people? And I think we have an awesome purpose, [..] helping more and more people experience financial wellbeing. You know, we’re improving the lives of people and we want to be more inclusive in improving the lives of people and helping them toward a better financial future.

    So, I think it’s an awesome responsibility, an awesome opportunity. It’s one that I'm seeing across every industry and I think the direction is clear. We’re going to move toward more purpose-driven companies. But, here’s the key to it all, and then I’ll wrap up. We’re in a world now where actions mean a lot more than words. Anyone can put posters around the office. You can put screensavers on the computer with great phrases, beautiful words. And at the end of the day, it matters but not that much. What really matters are the actions. Are you putting the purpose in action? Are you on the ground doing it day in and day out?

    And as you said, Rob, you know, you’re looking at long-term so that you are balancing all of the stakeholders, but unifying them all under this one principle, which is your purpose. That's how a purpose is made real and I think that’s where we’re headed, and it’s not isolated to any one industry.

    Rob Kapito: Well, Frank, thank you for that. And I will tell you the one thing I regret about doing this virtually and not being there is I’ve learned a lot from the people that come to the Latin America conference and I can tell you that some of that conversation has shaped the values that I bring back to BlackRock. So, I hope that in the future we can get together, because there’s great value to learn from everyone that comes to that conference, and I hope we can continue to share best practices in the future.

    Frank Cooper: I think there’s no better way to close than that, Rob, with those words. I want to thank everyone for taking the time, you know, spending this time with us. Thank you.