Some of that is rolling into passive funds, in particular ETFs, where BlackRock is picking up more than its fair share. So far this year, it has gained $US39 billion of new money in ETFs and $US25 billion in other indexed strategies. The shift toward passive that started in equity is now accelerating in fixed income.
The challenges associated with high inflation to rising interest rates are attracting more first-time bond ETF users.
Blackrock chair and CEO, Larry Fink
Until recently, bond ETFs were viewed with suspicion. Back in 2015, investor Carl Icahn, sitting alongside Fink on TV, called BlackRock “an extremely dangerous company.” His rationale was that the firm’s ETFs embed illiquid bonds in unsuitably liquid wrappers. “They are going to hit a black rock,” he said.
Yet during the panic of March 2020, when bond markets froze, ETFs performed efficiently. They moved to a discount to the value of the underlying bonds, but that didn’t lead to a fire sale of the securities.
Rather than transmitting stress, bond ETFs absorbed it while providing investors with much-needed liquidity. This real-life stress test validated the structure, and now that bonds are sagging, money is flooding across.
On his earnings call, Fink explained the benefits. He observed that investors are using ETFs to quickly and efficiently gain exposure to thousands of global bonds and recalibrate their portfolios.
“The challenges associated with high inflation to rising interest rates are attracting more first-time bond ETF users and prompting existing investors to find new ways to use ETFs in their portfolios,” he said.
For now, BlackRock’s fixed-income portfolio managers are mounting a solid defence. Unlike their colleagues in equities, their performance has been relatively strong. In the first six months of the year, the funds they oversaw declined by 10.6 per cent, marginally better than the firm’s fixed-income ETFs. According to the company, about half of taxable fixed-income assets are performing above their benchmark on a one-year view, compared with about a third of traditionally managed equity assets.
But if fixed-income follows the path of equities, the divergence between passive flows and active flows will only grow. “This is the early days of a major transformation of how people invest in fixed income,” said Fink last week. “We expect the bond ETF industry will nearly triple and reach $US5 trillion in AUM at the end of the decade.”
By then, BlackRock could be a lot larger, but its fortunes will remain firmly tied to the markets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marc Rubinstein is a former hedge fund manager. He is author of the weekly finance newsletter Net Interest.
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