BlackRock President Rob Kapito on the Outlook for Stocks—And How He’s Investing Now

Kapito met Fink at First Boston in the 1980s, when they popularized the mortgage-backed securities market. In 1988, he and Fink left to join the Blackstone Group, where they founded BlackRock (ticker: BLK). The asset manager was spun out in 1992. The rest is history.

Kapito is a down-to-earth executive with a logical mind. He chatted with Barron’s via Zoom about the outlook for equities, the retirement crisis, and what he has in his personal portfolio. An edited version of the conversation follows.

Barron’s: What’s driving the market today?

Rob Kapito: Before the crisis, [corporate] cash balances were at an all-time high, and companies went through many years of buying back stock and raising dividends. There were fewer initial public offerings. People needed yield, bond yields were low, and we know they are going to be lower for longer. That need drove a lot of people into private credit and alternatives, and large-cap dividend stocks.

Central banks have added enough money to drive markets. It’s very difficult for people to earn less than 1%, or zero, on their short-term investments—it makes a big difference in terms of retirement planning. We built out a large alternatives business and equity business on the view that people would start to barbell their portfolios in order to get yield.

So stocks will keep going higher?

I do think equities will continue to rally. It will be focused on three different areas. One: must-have equities, which are obviously technology and artificial intelligence and data and 5G. Two: should-haves, which are biotech and health care. And three: nice-to-have, which would be travel, leisure, and other sectors. We’ve learned what’s essential over the past eight months, and what can show the growth we need. That three-way bucketing of your investments will outperform other asset classes, like fixed income.

Some people need some fixed-income in their portfolios. What are their options?

The opportunities will be in private credit, similarly bucketed in those three areas. And certainly in private equity, which probably will continue to do well in this interest-rate environment, where many companies are looking to stay private. Historically private companies have done well, as have other alternative investments for fixed income, like infrastructure.

A new Democratic administration is coming in. What do you expect?

The Biden administration will focus on infrastructure and retirement. These are very important priorities to BlackRock and our clients. So, if there’s progress in these areas, that means there will be good opportunities for our clients, and more broadly, Americans and retirees. Everyone wins.

Retirement is the biggest issue facing the world as the population ages. Don’t we work all of our lives to be able to retire in dignity? This trend of people wanting to invest, needing to know how to invest and what to invest in, is only accelerating through Covid-19.

We’ve known for a long time that many people aren’t at all prepared for retirement. A year like 2020 puts [people] even further behind. Many individuals now think they’re going to have to continue to work in some capacity during retirement—what they’re calling encore careers.

For too many people, retirement planning is deprioritized because of imminent needs. You can’t invest for the future in the future. There are immediate benefits for those who start early. The same way that exercise has both short- and long-term benefits, focusing on retirement planning helps relieve a lot of stress and improves your overall well-being, and shows immediate emotional benefits.

So, we’re trying to come up with products that get people interested, trying to get people to save. I do think government intervention and a lack of spending caused many bank accounts to grow over the past eight months.

BlackRock is known for iShares, the largest ETF provider. Yet active strategies account for more than $2 trillion of your assets, and third-quarter performance was strong. What is the role of active management in the investment management industry today?

Our main goal is to keep our promises to our clients. They hire us for performance. I would say we must be doing our job pretty well. Asset allocation probably accounts for more than 90% of returns; alpha-generating managers play an important and differentiating role. Active strategies and strong performance after fees have a critical part in building that efficient, resilient portfolio. In the equity markets, people need extra alpha [outperformance] to be certain they achieve their goals and objectives. As public markets—both equity and fixed income—become more efficient, active managers need to find differentiated sources of alpha.

That’s why we invested heavily in Aladdin for analytics and risk management, and made big investments in quantitative capabilities across our active platform, to capture that explosion in alternative data. Additionally, private markets for clients are becoming a critical component for alpha.

Over the past decade, using a mixture of organic growth and acquisitions, we’ve built a $180 billion alternative investment platform: real assets, private credit, private equity, and hedge funds. Our capital markets team gives us access to a unique deal flow for clients. In 2020 alone, this team helped make thousands of investments in liquid and public offerings, and sourced well over 1,000 illiquid private opportunities. So, more than 80% of our active equity and taxable fixed-income assets are above their benchmark or peer median. For the three and five years, health sciences and the U.S growth franchise are top quartile; our technology fund is top decile.

We’ve now seen six consecutive quarters of active equity inflows and $22 billion over the past 12 months. So, active will continue to be important. Passive is also important, and passive can be used to actively manage your asset allocation.

Can private markets play a role for individual investors?

My goal is to make alternatives less alternative. Given this rate environment, most clients are going to need to increase their allocation to alternatives. Currently, the allocation to alternatives in high-net-worth portfolios is 2% to 4%. Given the outlook, these allocations have to grow closer to 20% over the next several years. Three years ago, we invested in a company that facilitates access to liquid alternatives for financial advisors and their clients—sourcing is the key differentiator. In the past few months, we’ve seen deal activity taking off. We have to start utilizing technology and risk management so alternatives are less alternative, and our clients are risk-aware, and they fit their portfolios much better.

You started your career in bonds. Would you have used bond ETFs yourself, back in the day?

Bond ETFs are bringing transparency and liquidity to many corners of the bond market. Coming into 2020, we heard a lot of skepticism about how these funds would perform in stressed markets. People like to forget that bond ETFs survived the financial crisis, the taper tantrum, and various periods of volatility.

They were tested this year in unprecedented ways. They passed with flying colors, and they provided price discovery when the rest of the market was frozen, and clients could trade bond ETFs when they couldn’t trade the underlying bonds.

We’re seeing more and more active managers and insurance companies and sovereign wealth funds all using bond ETFs for multiple purposes. Think about it: liquidity management, longer-term asset allocation. Can you imagine having thousands of line items of corporates and mortgages when you can replace them very simply with an ETF? They’re 1% of the bond market. And in asset allocation, a lot of advisors use them. If you decide emerging markets are where you should be, and it takes you a while to find the manager, the opportunity is already gone. So, go into an emerging markets ETF, have the coverage, and then figure out what you want to do.

BlackRock now dominates the money management industry. Is it too big to fail?

I would disagree with your use of words. Both Republicans and Democrats agree that asset managers aren’t systemically important. Why? Because the assets under management are not our money. We aren’t a hedge fund. We don’t have 100% discretion. We’re acting on behalf of institutions and pension plans and individuals. They have specific guidelines that we have to maintain.

What do you have in your personal portfolio?

I own BlackRock stock, and triple-tax-free New York municipal bonds. I own a few health-care stocks, including vaccine stocks. I’m not sure for the long term that they’re going to be a great investment, but I want to participate in the companies that are doing the research to come to us with a cure. I own a few large banks. The banking institutions across this country are doing a very good job, and I think their balance sheets are much better. They’ve been overlooked over the past couple of years for various reasons, and I think there are opportunities in there, too.

Thanks, Rob.

Write to Leslie P. Norton at [email protected]