The world's largest asset manager has made great strides during the past year to pull the various strands of its acquisitions together to offer a fully functional service across asset classes and investment strategies to official clients all over the world. Whether it is a European central bank seeking access to passive equities as it looks to diversify its reserves; or a Latin American reserve manager seeking out performance expertise in fixed income, BlackRock has the capacity to provide the solution.
The New York-based asset manager's integration of Merrill Lynch Investment Managers (MLIM) in 2006 and Barclays Global Investors (BGI) in 2009 has not been without hiccup. Some parties in recent years had expressed concern that BlackRock was more interested in accumulating assets under management (AUM) - along with the associated fees - than boosting clients' returns. But BlackRock has made impressive efforts in the past year to improve its client relationship team and ramp up its intellectual offering to sovereign clients. BlackRock now has nearly 90 sovereign clients, including about 40 central banks involving some $120 billion in asset under management (AUM) - a figure that rises to more than $250 billion for all sovereign clients. If exchange traded funds are included, BlackRock manages an estimated $150 billion on behalf of as many as 50 central banks, although precise ETF ownership cannot be ascertained.
Philipp Hildebrand, BlackRock's vice-chairman, who was governor of the Swiss National Bank (SNB) until January 2012, describes the firm's services in the reserve management domain as "one of the reasons I joined". He adds that chairman and chief executive Larry Fink "in the last two-to-three years [had] really tried to reposition the firm away from" any previous reputation as an asset gatherer to a ‘solutions' provider.
Hildebrand also notes that the BGI acquisition has "helped tremendously because it allows us to offer the entire spectrum basically all the way from passive to active in virtually all asset classes" and that its cultural legacy has given BlackRock's client relationships a boost.
A senior reserve manager at a Latin American central bank confirms this: "With the acquisition of BGI, they have become much more client-oriented." He adds that BlackRock is "very good in terms of service" and describes the asset manager today as "totally different" in this regard compared with a few years ago.
Meanwhile, a senior reserve manager at a mid-sized European central bank, which has placed about $2 billion apiece in reserve assets with BlackRock and State Street Global Advisors in passive cash equities, commends the firm's "very professional approach towards us as a client, as well as to our custodian".
BlackRock's wide-ranging investment capabilities in active or passive strategies - tailored to correspond to the varying needs of sovereign clients - give it an edge. The New York-based asset manager has also had the confidence to challenge long-held assumptions about the way financial markets function, not just in theory, but in practice, at a time of gnawing uncertainty and sweeping change in financial markets.
A paper published by two of its senior managers in June encouraged sovereign investors to rethink ‘truths' that reserve managers have clung to for nearly three decades. Rather than seeking ‘safety, liquidity and return', Peter Fisher, senior managing director at BlackRock's Investment Institute, and Terrence Keeley (pictured), head of the firm's official institutions group, argued in favour of a more modest, but achievable aim: reserve managers should "consciously balance volatility and liquidity constraints against an income objective".
"It is imperative for central banks to move beyond this idea that they can meet all three objectives, since they cannot," says Keeley, who believes the distinction between "safe" sovereign debt and "risky" equities is "at best misleading". BlackRock, for example, offers customised multi-asset portfolios to its sovereign clients that have performed better than traditional fixed income, which has been subject to recurring bouts of volatility over the past year. Active returns in one multi-asset assignment for a central bank client exceeded 150 basis points over the past year (more than most central banks made on their entire fixed income holdings), says Keeley, referring to November figures.
BlackRock has also had some good traction in securing mandates from central banks as they open up to investing in equities. A reserve manager at a European central bank investing in equities rates BlackRock's performance as "very good" due to its "sound skills and capacities". He also singled out the "wide range of asset classes covered" as one of the asset manager's real strengths.
Hildebrand's experience - he played a big part in the SNB's pioneering foray into equities - has also been of benefit in terms of offering advice to central bank's looking to diversify. Moreover, for central banks seeking to deploy more tactical strategies, BlackRock offers a host of ETF strategies ranging from emerging markets fixed income to minimum volatility equity as an alternative to the use of external managers. This gives more anonymity for trading - there is no public request for proposal to external managers or the need to fire a manager when the central banks want to exit the trade.
However, with the large majority of the world's central banks still keeping most of their assets in core reserve currencies, a top-tier external manager must continue to offer excellence in US dollar assets - the world's most liquid instruments - as well as other special drawing right assets.
BlackRock's short-duration team has demonstrated an ability to act quickly to market events and identify the best risk-adjusted opportunities to execute their investment strategy, resulting in notable returns for clients at a time when short-end yields have effectively remained at zero. The short-duration team generated 45bp of benchmark outperformance for some central bank clients during the past year, according to BlackRock, through strategies such as BlackRock's Low Duration Bond Fund.
The forward markets' general misreading of the scope and timing of tapering by the Federal Reserve played "an important part" in achieving this outperformance, says Keeley, when asked to highlight one of the short-duration team's key macroeconomic calls.
At one point, forward markets started pricing in a hike of 150bp just a few years down the road. "Our investors think that the [Fed] funds rate will be at zero for a considerable period; that's why they carefully monitor when markets overplay tightening," Keeley adds. "An important part of their alpha contributions have come from forward curve miscalculations."
Due to its sheer scale and lingering legacy issues, BlackRock will never be the nimblest operator in the market - although some of its fund managers are as quick to take advantage of market opportunities as anyone else. But BlackRock has the market insight and global reach coupled with an agnostic attitude to asset, instrument or management style that presently appears without parallel.