Faith, hope and...choice: Larry Fink’s latest chairman’s letter to investors

Larry Fink’s long-awaited letter to investors arrived late last week.

This is a single letter to Blackrock investors shared with all stakeholders, replacing the two letters from previous years: one to the CEOs of companies in which Blackrock invested and one to investors. The change reflects Fink’s view that the issues facing Blackrock shareholders, clients, partners, communities Blackrock operates in and companies in which it’s invested are largely the same. It is also twice as long as the previous letters.

In keeping with the times, the letter strikes a confident tone on capital markets and takes a long-term value perspective.

Bread and butter focus, with a bit of defensiveness

The letter seems less expansive than previous letters, is more focused on “bread and butter” investment thinking and, to a degree, is a bit defensive.

A little defensiveness is unsurprising given the context that Blackrock and its major competitors, Vanguard and State Street are operating in, notably the United States (US) political context federally and in the States. The focus of the US House of Representatives Financial Services Committee Republican ESG Working Group is on the impact of investment fund and regulators considering matters other than financial returns in their activities. Some US States have sought to withdraw their investments from Blackrock linked to the companies investment focus on the environment, social impacts and governance. Vanguard, another major US investment firm, has faced similar pressures, including with a climate-related fund.

Choice is key

In a 20+ page letter, “choice” features 25 times.  

Fink emphasises that Blackrock’s investments are made reflecting investor preferences and mandate, as the company’s role as a client responsive fiduciary. Client choice also features in the company’s decision to give clients Voting Choice in public and private pension plans in the US and globally. Fink notes that this needs to be buttressed with significant client education and information, as well as expanding the number of proxy voting advisers to provide this, in addition to Blackrock’s own work.

This responds, in part, to suggestions that Blackrock has significant market power (as one of three major investment firms) and, as such, was acting in the management’s interests, not their clients.

Emphasising long-term value

Taking a long-term perspective for investment is a persistent theme in the letter. That long-term value focus means focusing and developing insights on a wide range of factors that could impact on investments over time, including economic fragmentation, shocks to supply chains, geopolitical factors, energy market transitions (including those prompted by climate change considerations), digital technology and AI, national security responses, inflation, and trust in the financial system, productivity, and labour force participation.

Fink also discusses the current lack of maturity with digital assets and technologies currently, with as “elevated risks”. However, he cautions against writing off these developments and suggests that block chain and digital tokens, among other digital assets, could help drive efficiencies and innovation in investment management.

In the end, however, this longer-term value perspective means paying attention to the sources of capital (shareholders), financing (banks and other financial institutions), management and employees, customers and the wider community in which firms and other organisations operate – in short, stakeholders.

In addition, in that context the letter draws specific attention to employees: “Successful CEOs understand the need to build bonds with a full range of stakeholders – but especially their employees…Blackrock research shows a strong correlation between companies with better culture and values rating compared to industry peers and their stock returns.”

Changing economic foundations

Inflation in the US, and perhaps elsewhere, will be more persistent than expected as a result of a greater national security focus and company resilience building, according to Fink. This reflects firms building resilience into supply chains by sourcing production closer to their home markets and government intervening around the sourcing of products (e.g. computer chips given the “Chips Act” in the US) and the flows of capital (e.g. into and out of the US from certain countries and companies). The letter suggests this reflects a trade-off between returns and sourcing from the more competitive firms in return for better national security concerns. This example of the causes of potentially persistent inflation in the US, is likely to differ to the condition in other parts of the world, including in New Zealand, but could significantly change trade patterns with wider impacts for our part of the world.

Good governance matters and changes are coming

The letter also puts significant weight on trust and a “belief that tomorrow will be better than today”. Given recent bank collapses, Fink highlights the financial sector in making this observation.

The turmoil and lack of certainty, understanding the drivers and potential outcomes (risks and opportunities) and the impact on value all require sound governance and business practices, according to the letter.

And Fink suggests that changes in voting arrangements for companies will reshape corporate governance in the next 10 years.

From New Zealand, IoD will be watching these developments with close interest, seeing the extent to which the pressure on major funds on Voting Choice extends here, and, with our Global Network of Directors Institutes’ counterparts, keeping an eye on the impact on corporate governance as it “reshapes” in the next decade or so. 

* BlackRock, Inc. is an American multi-national investment company based in New York City. Founded in 1988, initially as a risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager, with US$9 trillion in assets under management as of the end of 2022. BlackRock operates globally with 70 offices in 30 countries, and clients in 100 countries. Along with Vanguard and State Street, BlackRock is considered to be one of the big three index fund managers that dominate America.