What’s Ahead for BlackRock in 2023

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. BlackRock is the largest asset manager in the world. BlackRock is perhaps best known to individual investors here in the U.S. for its ETFs, managed under the iShares umbrella. Here today to discuss BlackRock in-depth, including new developments at the firm that investors should be aware of, is Bryan Armour. Bryan is Morningstar’s director of passive strategies in North America.

Nice to see you today, Bryan.

Bryan Armour: Thanks for having me, Susan.

BlackRock and Vanguard

Dziubinski: So, now, at the Morningstar Investment Conference, which is coming up, you’ll be in conversation with one of our colleagues, Alec Lucas, to talk about BlackRock and Vanguard. Now, this session is no doubt going to attract a lot of interest, not only because these are two of the largest asset managers here in the U.S., but also really, they’re the two significant players in the ETF market and we know how that is growing at a very rapid pace. Let’s talk a little bit about—what would you say are some of the two or three things that actually differentiate BlackRock and Vanguard from each other?

Armour: Yeah. So, I think, to your point, the big three has sort of become the big two with BlackRock and Vanguard. And one of the big points of differentiation is the product lineup. So, what we see from Vanguard is a lot of low-cost, core diversified strategies that tend to—any investor could go up and pick one off the shelf and it would work out great for them. But with BlackRock and iShares in particular, what we see is a focus on giving investors maximum amount of choice, which is, they try to be the best at—in every market segment, they try to offer many different strategies. And what happens is, investors need to be a little bit more careful, but it’s also at the same time a one-stop shop. It has everything that any investor could ever want.

BlackRock’s Passive Strategies and Costs

Dziubinski: Now, fees are, of course, a critical part of fund investing, specifically when it comes to investing in an index fund or an ETF that’s passively managed. How do BlackRock’s passive strategies stack up in general in terms of cost?

Armour: It really depends on the strategy, but in general, they are relatively low-cost. They made a big tactical move in 2012 by adding the iShares Core lineup, which brought real cheap building blocks that any investor could use to build a portfolio for a very cheap price. But that’s not true holistically. They also have other areas like legacy products that come at a much higher cost and so investors need to be more careful when they select a BlackRock fund.

Dziubinski: Got it. Let’s talk a little bit specifically about the iShares ETFs. As you alluded to, BlackRock really, kind of, slices and dices the market, offering dozens and dozens of options for investors. But they also do have those funds that represent those key building blocks. Talk a little bit about the variety that investors will find here and how they might use some of these strategies that maybe aren’t the core strategies.

Armour: Going back to the Core, its building blocks, low-cost. We talked about legacy. In some ways, that can represent a big difference, and it’s really that the legacy products, they keep that higher fee because they’re used more by traders than investors, even though the assets under management might not reflect that. But there is also—iShares produces single-country ETFs, sector ETFs, thematics. They’re big in the bond world and in equity and allocation strategies. They have a wide, diverse array of different funds that goes well beyond just the Core lineup of I believe about 20 ETFs.

How Do Actively Managed Funds Stack Up?

Dziubinski: So, let’s turn our attention to BlackRock’s nonindex products for a little bit, which are its actively managed strategies. Start talking a little bit on the active funds’ equity side of things. How do the equity funds that are not indexed stack up?

Armour: They’re not the biggest strength that BlackRock has. They’re not exactly known for it. But at the same time, they have had some success. They’ve had relative category average success, maybe not beating their benchmark too often, but beating competitors. And so, it’s an area where they have some solid managers. They have a deep bench, very well experienced, well-resourced. But the results haven’t been astounding.

Dziubinski: So, let’s talk a little bit about the actively managed fixed-income side of things with BlackRock. And there, we actually rate many of their actively managed fixed-income funds quite highly. What are they getting right there? What’s working?

Armour: Yeah. I think we actually rate 12 different strategies as Gold-rated. It starts with Rick Rieder. He recently received the Morningstar Outstanding Portfolio Manager award. He took over the fixed-income operations in 2010 and has really built a very strong competitive bond lineup. We see excellent intensive research in their strategies and a focus on risk that maybe every asset manager doesn’t have that same level of focus on risk. And it comes back to Aladdin being sort of the impetus of Larry Fink starting the company, and risk management has just been a core principle and that shines through in their fixed-income team.

BLK Scores High in Morningstar’s Ratings

Dziubinski: Morningstar assigns asset managers what we call our Parent ratings. And in a nutshell, Morningstar’s Parent ratings really are trying to capture how well a fund group aligns its interests with those of its fundholders. BlackRock earns an Above Average Parent rating. So, unpack for us a little bit about how Morningstar approaches that Parent rating with BlackRock, what BlackRock is doing well on that front and what maybe there might be a little room for improvement.

Armour: We definitely think highly of BlackRock. They’re one of the most well-resourced firms from a system’s and a people capacity. And so, we’ve seen a lot of—like Aladdin, we talked about, not only is that scalable and allows them to grow their business and acquire new businesses and seamlessly bring them on, but it also has allowed them to license that product to other institutions and it’s really a best-in-class product. And then, on the talent side, we see some leaders that have been around for a long time, leaders that have left being highly successful elsewhere, which really speaks to the talent pipeline there.

Dziubinski: Is there anything where that prevented them perhaps from getting that high rating?

Armour: Yeah. So, there’s two things. Number one, when we talk about the legacy products, thematics, when they get a little more adventurous with their products than maybe like a Vanguard would, the focus is not as much on investors as perhaps at other asset managers. And part of that reason is that it comes down to management structure. So, when comparing Vanguard, which is a mutual ownership structure, where the shareholders are actually the owners of the company, BlackRock is publicly traded, and so, that can create conflicts of interest between different stakeholders potentially. But overall, they’re very competitive, and competition between asset managers can be to the benefit of investors.

ESG Is at the Center

Dziubinski: Exactly. Now, BlackRock has made environmental, social, and governance, or ESG investing, a core part of its business. Explain what it’s been doing on this front and how their ESG funds stack up.

Armour: They’re the largest issuer of ESG ETFs in the U.S. by a long shot. They really offer everything from low-touch ESG strategies to impact funds to green bond funds. They have a wide variety. The operative term of providing choice to investors applies in ESG, too. And I think it’s a really good spot for it because ESG means different things to different people. And so, having all the different layers allows investors to choose the one that works for them. It does take a little more research to figure out what works. But they’ve applied ESG across the board to bonds, domestic equities, developed markets, emerging markets. You could pretty much get anything in ESG form at this point.

Growth and Model Portfolios

Dziubinski: Got it. Now, let’s talk a little bit about perhaps a couple of growth areas for BlackRock, one being they’ve become a significant player in this model portfolio space. What should individual investors know about BlackRock’s presence in this space? And is this something that BlackRock has made available to individual investors?

Armour: Model portfolios aren’t necessarily hidden, but you could probably get a good feel for what’s in there, but they do change over time. And I think the big thing with model portfolios is that it’s a really good way to plug in solid investment choice for advisors. So, it would most benefit investors to have advisors that are able to employ these model portfolios, do so at a low cost, get diversified portfolios and then focus on maybe some other areas that are more alpha-seeking for an investor like their personal wealth-management strategies and tax planning and things of that nature.

What Is Voting Choice?

Dziubinski: Got it. And then, lastly, BlackRock has been a proponent of what’s known as voting choice. Explain what that is and why that’s something that U.S. investors in BlackRock’s funds should be keeping an eye on.

Armour: We’ve seen a push by various asset managers into trying to provide more choice in proxy voting. Typically, the fund managers will vote shares on behalf of the shareholders. But what we’re seeing is they’ve given that choice to institutions, and they’ve really taken the most nuanced approach by offering not only multiple policies to choose from but also you can take everything back yourself and so on for institutions. The big step forward recently is that they opened up the ability to vote your own shares to individual investors in the U.K. for specific mutual funds. I think they’re working hard to get better regulatory acceptance of that, and hopefully, that’s something that at least is an option for investors down the road.

Dziubinski: It could be something that would come to the U.S. at some point?

Armour: Yes. That’s the hope.

Dziubinski: Well, great. Thank you so much for your time today, Bryan. It was really great to see you.

Armour: Thank you, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.