Investors need to take a different approach to allocations despite a post-crisis market recovery, as the 'great rotation’ in portfolio holdings has not yet occurred, says Laurence Fink, chief executive of BlackRock.
“We’re in an environment that’s truly characterised by low interest rates, more market volatility, extreme short termism, economic stagnation and political gridlock in so many parts of the globe,” says Fink, in a keynote address at the Credit Suisse Asian Investment Conference in Hong Kong yesterday.
Yet on the surface, it would appear that conditions are back to pre-crisis. "The Dow [Jones Industrial Average] is exactly where it was five-and-a-half years ago,” he says, underlining the need to have a long-term view.
“The preoccupation on investing, the preoccupation on what Cyprus means for you today … most of this stuff that we hear in the media is truly not worth the time following,” Fink told a packed audience.
However, the self-professed equities bull notes that underlying market conditions have changed, and as such investors are adapting to the new environment.
BlackRock, the world’s biggest asset manager with $3.8 trillion in AUM, has seen flows moving into equities, mostly in the form of exchange-traded funds (ETFs), says Fink.
“Since the beginning of the year BlackRock has seen over $21 billion in flows into ETFs,” with equities comprising about 90% of the underlying assets.
“Retail obviously represents a large component of this growth,” adds Fink, “but at BlackRock 70% of our flows in ETFs are institutional.”
He expects a continuation of the trend, which would be good news for BlackRock whose iShares unit is the biggest provider of ETFs globally.
“The great rotation hasn’t even begun yet,” says Fink, referring to a widely anticipated shift from low-yielding bonds to equities.
The bond market had a 30-year run when annual yields were 8%. It led pensions and insurance firms to use bonds as a major component of their investment strategy. “That just can't happen where interest rates are now,” says Fink.
“We’ve had some very large pension plans come to us and we have taken all of their credit, all their corporate bonds, and redelivered them ETFs,” which have less product risk than “any one bond”, he explains.
Fink advises retail investors likewise to shift away from bonds. “If you’re 30, 35 or 40 years old [and] when you have as much as 35 or 40 years of working [life ahead], why would you own a 10-year bond? You’re just harming yourself. You’re not earning adequate returns.”
He jokingly adds: “And why do you care about Cyprus if your liability is 35 years?”