“BlackRock is the biggest asset manager in the region and therefore by default the biggest investor in companies so we’re there by dint of our size and influence,” comments chairman of BlackRock EMEA, James Charrington (pictured) in response to his joining the IIC Advisory Council.
The world is undergoing enormous change right now and still trying to find its feet in the wake of the financial crisis. Events this week, with stock markets tumbling and treasuries rallying as fear grips the investment community over the endless eurozone debt debacle, show that short-term optimism, artificially buoyed by QE1 and QE2, was misplaced.
“I think we’re going to look back on this period as one of extraordinary adjustment both generally and in terms of how people fund their retirement going forward,” says Charrington. The issue for all investors including institutions, he believes, is how to deal with long-term liabilities with people living longer. Retirement plans need, somehow, to be funded more deeply than ever before.
Right now, risk is being taken off the table. People are sitting on cash and holding bonds nominally yielding a paltry 3%. Pensions with 30-year liabilities are being chronically underfunded and as Charrington asks rhetorically: “At what point does appetite for risk come back on the table?”
There’s a huge focus from various parties on the role that large shareholders play in companies, what the responsibilities are towards governance. As the Advisory Council’s voice for BlackRock, Charrington believes that, moving forward, they need to be clearer about the responsibilities they have as shareholders, and how they exercise them ‘both on behalf of our investors and the companies we invest into. As shareholders we need to help companies be more constructive but hold them to account when necessary as well.”
One of the natural consequences of the market dislocation in ‘07/’08 was a pull back from perceived riskier assets like alternatives. The FoHF providers were hit badly as underlying managers faced wholesale redemptions. Thanks to the strength of its screening process and due diligence though, the firms that BlackRock has been associated with historically came through the period strongly.
This was an endorsement of the process says Charrington, who notes that as a hedge fund provider, much broader and deeper due diligence is being done on BlackRock: “The importance being attached to us as an organisation and our financial integrity, as well as our investment process, is rising. We’re more attractive today than we’ve ever been because of the size, scale and strength of our organisation.”
A lot of institutional investors are using a barbell strategy: commonly applied to investments in short-term low-risk bonds and long-term higher risk bonds, Charrington says that there’s been higher levels of indexation on one side and an increased appetite for more aggressive alpha strategies on the other. Although still far from being a “risk on” environment, there are signs that demand is increasing for all of BlackRock’s alternative products, not just hedge funds. “That’s an area we’ll continue to build out throughout the course of the year,” says Charrington.
More importantly, one of the ways BlackRock is trying to help its investors grapple with their liability burden is to broaden its product mix by moving into the alternative energy space. As Charrington emphasises, this isn’t about investing in alternative energy companies: rather it’s about direct investing in the projects themselves. To help, BlackRock Alternative Investments recently joined forces with Dublin-based renewable energy company NTR, bringing over a team of twelve from Ireland to establish an infrastructure investment group.
“We’re seeing a lot of global interest from pension funds with long-term liabilities because these projects are, by their very nature, long-term. It’s a new area for us. The demand for alternative energy is going to increase. The question is at what speed,” explains Charrington.
So what does he think the key role of the Advisory Council will be over his two-year tenure?
“I think through the Advisory Council we can create a better collective understanding of the role we play as institutional shareholders in the governance of organisations, and the roles and responsibilities that they have to us.”