Philipp M. Hildebrand: Inclusive Capitalism From the Perspective of an Asset Manager

06/23/2015 06:50 am ET | Updated Jun 23, 2016

Before reflecting on what we, as asset managers, can do to foster inclusive capitalism and a longer-term investment perspective, it is essential to understand the key characteristics of an asset manager.

An asset manager does not own the assets it manages; these assets are entrusted to it by its clients. The asset manager itself therefore has a very limited balance sheet and, it can be argued, circumscribed influence.

It is the asset manager's clients who determine the investment approach and define the mandates under which the asset manager is tasked to conduct its investment activities. Asset managers do not engage in proprietary trading. They are fiduciary investors acting in accordance with their clients' stated objectives and interests.

This, of course, means that an asset manager can only take steps to pursue a more inclusive form of capitalism in partnership with its clients, the owners of the assets it invests.

Working with corporate leadership
That said, it would be wrong to assert that asset managers have no role to play in fostering good corporate stewardship and extending the time horizons of the businesses in which they invest.

We believe that asset managers can and should play a role in encouraging corporate leaders to (a) challenge the increasing shortterm demands of capital markets by taking a longer-term approach to their businesses and, crucially, (b) to better explain this to the capital markets.

Investors need to understand what makes up a company's longterm strategy for growth, what drives real value, how and when far-sighted investments will deliver returns and, perhaps most importantly, what metrics shareholders should use to assess their management team's success over time. If these things are wellunderstood, companies should have far better prospects of attracting the patient capital they seek.

As the world's largest provider of index products, BlackRock holds considerable stakes in a large number of companies throughout the world on behalf of our clients. A significant part of these investments reflects our clients' desire to be exposed to and track a particular market segment over time. This gives many of the investments we make a natural long-term bias. In effect, as long as our clients want to remain invested and as long as they choose to do it through our index products, BlackRock is bound to be a longterm investor on their behalf. We therefore have a naturally aligned interest in seeing companies make sound decisions with the longterm in mind. Along with our ownership comes a responsibility to vote. Under the fiduciary principle, we have to vote in accordance with what we think is in the best interest of our clients over the long term. We therefore want the leadership of the companies in which we invest on behalf of our clients to focus on long- term strategies and longterm success.

To this end, our CEO and Chairman, Larry Fink recently issued a letter to the leaders of the companies BlackRock invests in to ask for their support in helping shareholders understand the investments they are making to deliver the sustainable, long-term returns on which our clients depend and in which we seek to support them.

Asset managers and investment innovation

Asset managers also have an opportunity to exercise an investment leadership role by facilitating innovative investments for their clients. They can, for example, help design and provide innovative vehicles that enable clients to make investments that are motivated by a desire to see our economies and our markets become more inclusive and more considerate of the long term.

Along these lines, BlackRock is currently in the process of launching an impact investing platform which will reach across different asset classes, including Green Bonds, sustainable infrastructure and impact ETFs. Similarly, we will shortly launch an endowment-type investment offering designed explicitly for clients with long-term investment objectives.

This facilitation and intermediation role can be very important: successfully executed, it changes the options available to existing clients and can also attract new client segments with particular - more expansive - objectives. If we are able to demonstrate the success of investments that have particular, more inclusive goals, then we will be in a position to attract more capital to this particular
type of investment vehicle.

It must be stressed, however, that clear limits remain: an asset manager's ideas and innovations must meet the test of the marketplace. Additionally, as fiduciaries, asset managers must not become principal investors.

Asset managers can, therefore, help steer the world towards a more inclusive form of capitalism. But we should also remember the role that regulators and governments play. It is critical that they engage appropriately with the owners of financial assets as well as with the asset management industry. In effect, we need a three-way conversation to support more inclusive capitalism.

Governments and regulators set the framework within which investors deploy their capital. For example, accounting regulations play a pivotal role in determining how insurance companies and
pension funds project forward the liabilities they need to be matched by their investments. The nature of these liabilities has an important impact upon the type of investments asset owners will seek and will task asset managers to secure.

If we want to achieve greater sustainability and a more long-term orientation it is essential that these core incentives are aligned.

A final thought
We should neither overstate nor understate the influence of asset managers within the financial and investment system. Ours is a delicate, yet foundational role and we therefore need to give great thought as to how we can best meet our fiduciary obligations towards our clients.

At the crux of the debate around inclusive capitalism is the question of whether there really is a trade-off between promoting long-term interests and sustainability and securing short-term returns. As we explore this question more fully, we hear pretty convincing evidence to suggest that the trade-offs may be much more limited than many assume. Assuming that this is indeed the case, we asset managers are in the fortunate position that executing our fiduciary duties will allow us, even encourage us, to act in the longer-term interests of society and our economic system.

Philipp M. Hildebrand: Vice Chairman, BlackRock Inc.