Larry Fink may not be a household name but he’s certainly one of the most powerful men on Wall Street—and in all of American business. He’s also a man steeped in parsing risk, someone who sees around corners to succeed.
As the co-founder and CEO of BlackRock (BLK), the biggest asset manager on the planet with over $4.6 trillion (that’s with a “T”) of clients' funds under management, Fink must be constantly up to speed on the global financial markets and all their vagaries. It is a remarkably tall and complex order, and over the years it has seemed to make Fink, 62, all that more thoughtful. So it’s perhaps surprising and maybe disheartening to hear that Fink believes the biggest risk we face isn’t rising interest rates or China -- it’s us! (As for stocks, hint: they’re not as good as they used to be.)
I recently sat down with Fink and he spoke at length about a national emphasis on the short term at the expense of the long term, our failure to work together in Washington and yes, the markets.
Fink has been working his “long termism” campaign hard lately, firing off letters to some 700 CEOs and top executives, requesting that they focus more on long-term objectives and less on quarterly goals and financial engineering in particular to achieve them. He says he received some 250 letters back—a not surprising return given that the letter was sent by the world’s biggest investor.
Fink explains what he’s up to: “What we requested was—[that] as a long-term shareholder we need to better understand long-term strategy. How are you going to reinvest in your company? How are you going to think about reinvesting in your company in terms of jobs, factories, stores—whatever the company may be. In terms of R&D. And then tell us what are the inorganic strategies. Divestitures or possibly mergers. Where do you see the opportunities? And then what is your capital management plan—how many shares do you expect to be purchasing back every year and how do you think about dividends and dividend increases? Give us a comprehensive understanding of how you are going to navigate those points and then we as long-term investors can measure the management team—their board—on this long term strategy.”
Fink blames the media some (a familiar scapegoat, I point out defensively), saying media empowers activists. “It’s a really good storyline, you know, individual investor shaking this big giant corporation—so it’s a big loud narrative. I wrote the letter saying ‘OK, I am tired of this.’ This narrative is too large and too loud. Media makes more money on focusing on the noise than focusing on long-term outcomes and long-term strategy. ”
Not all activists are bad, by the way, according to Fink, pointing out that BlackRock actually has supported activists 60% of the time in shareholder votes. But not in the case of the recent proxy battle at DuPont where BlackRock voted with management. “Here is a company [DuPont] that was growing by—shares were going 16% for the last five years, the management team is very engaged and they are very engaged with their shareholders and we didn’t think it was appropriate—though we like Nelson Peltz, we think Nelson Peltz has done a very good job with other companies.”
Dissastisfied with Washington
As for our government and how it functions, “We deserve more,” Fink says. “Quality of life is deteriorating in the United States because we are not investing in infrastructure. If we had a Washington that [worked], I actually believe the economy would grow 1% to 1.5% more than it is today." [Here's Fink’s full take on Washington.]
Fink goes to Washington “a lot,” he says, as both someone who is summoned for his expertise and also to lobby for change. The experience can be “…frustrating. You have the meetings with some of the men and women in Congress. They’re supportive of what you say, but then you leave, and you waste more time and you waste more time. And nothing has happened. And sometimes it’s probably more effective to talk to you, to express this through media than going to Washington.”
Fink isn’t suggesting we are bereft of good old-fashioned financial risks. They are certainly out there, and even more so today. He says risk is present in at least two forms: valuation and central bank monetary policy. Though he does see “positive returns for 2015,” he says he isn’t “as sanguine or as positive as I was two years ago. I think there are many more warning signals today than there were two or three years ago. Two years and three years ago I said be 100% in equities. I would not recommend that today because the valuations are much higher. And more importantly we have extreme valuations because of the central banks’ behavior." He added that the FSOC—the Financial Stability Oversight Council of the United States—recently said in their annual report that the Fed's years-long quantitative easing policies have moved "many assets into extreme valuations."
"That doesn’t mean we have a collapse. It just means either a), we need to get caught up to those valuations or b) we will see a Federal Reserve begin normalizing rates in the coming year or years,” Fink says.
The retirement crisis
Lower gas prices have not translated into higher spending by Americans and that concerns Fink, although he does see a silver lining and some nuances. “I have been speaking for a number of years, the biggest crisis in America is going to be the lack of savings for retirement,” he says. So the fact that Americans are wary of spending any windfall after having just gone through a once-in-a-generation financial crisis, and in fact are saving more is probably a net positive.
But as someone so familiar with measuring risk, Fink sees a consequence to this societal behavior. “Could we not be seeing a real change in psychology in Americans, which in the long run is good but it really limits the growth of the economy today,” Fink asks. “Could we be seeing Americans saying we have no choice but to save? You could say that’s a good thing. We’re finally getting men and women who were 10, 20, 30 years away from retirement beginning to save more towards retirement, but it just means we are going to have a weaker economy than we otherwise would have predicted. And that means we will probably have less-great job creation. We’ll have less flexibility in our economy.”
That kind of thinking speaks to Fink’s own long-term perspective. And to his understanding of the tradeoffs and risk that lurk around every corner.