Larry Fink’s letter to BlackRock shareholders from BlackRock’s 2015 Annual Report.
Since BlackRock’s founding 28 years ago, we have earned the trust of our clients and created value for our shareholders by helping investors navigate the global markets to build better financial futures.
Investors today are facing tremendous uncertainty fueled by slowing economic growth, technological disruption and social and geopolitical instability. Particularly worrying is the adoption of negative interest rates by central banks attempting to spark economic growth. Their actions are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less liquid asset classes and increased levels of risk, with potentially dangerous financial and economic consequences.
Markets are also still digesting the dramatic shift in the cost of energy as a mix of technology and geopolitics has transformed supply. Beyond its effect on energy prices, technology continues to disrupt many industries and even societies as it reshapes global employment markets. In China, growth is slowing with global effects. In the U.S., the quality of corporate earnings is deteriorating, with record share repurchases in 2015 driving valuations — an indication of companies succumbing to the pressures of short-termism in place of constructive, long-term strategies. Finally, electoral politics is contributing to market uncertainty around the globe. Polarizing elections in the US and Germany; government transitions in Spain, Taiwan and Canada; allegations of scandal in Brazil and the UK vote in June on whether to leave the European Union will all continue to drive volatility.
In such a hostile landscape, our mission for investors has never been more vital, nor, the responsibility we feel to clients stronger. We believe the trust that clients place in us must be earned every day, and that’s why we remain committed to constant improvement and reinvention.
BlackRock has always worked to anticipate and embrace the changes affecting our clients, the global markets and the financial services industry itself. From our earliest efforts to build our own technology to help clients quantify risk in their portfolios, to providing investors with access to a full range of active and index investment solutions on a single platform, to expanding the use of new investment strategies like factor investing and big data, BlackRock has never stopped innovating — and we never will.
Our commitment to our clients and to constantly evolving our organization to meet their needs is also central to our framework for creating long-term value for our shareholders. In a letter I sent earlier this year to CEOs of companies in which we invest on behalf of our clients, I asked every CEO to lay out for their shareholders a strategic framework for long-term value creation — one that provides a perspective on the future, articulates the impact of the ecosystem on their strategy, explains how changes in that ecosystem might force the company to change course and identifies metrics that support a framework for long-term sustainability. In this letter, it is my goal to do that for you, BlackRock’s shareholders.
This year’s annual report explores how the foundation we have constructed over the past 28 years at BlackRock is built for change. It tells the story of how evolution and transformation are core to how we serve clients and the way we manage the firm; how our global investment platform, use of technology and One BlackRock culture allow us to serve our clients; how we help our clients invest with purpose and advocate on their behalf; and how we are developing the firm’s next generation of leaders — all of which will generate value for our shareholders over the long-term.
Larry Fink – Generating long-term shareholder value
Our strategic framework for long-term shareholder value creation
BlackRock’s framework for long-term shareholder value creation is directly aligned with acting as a fiduciary to our clients. Our goal is not simply to sell individual products, but rather to understand clients’ objectives and fashion cohesive solutions that help achieve those objectives. While many firms claim to do the same, no other firm can draw on our breadth of active, index and alternative strategies, of investment styles across asset classes and regions, and of risk management and technology capabilities. And because our clients’ needs are constantly changing, we regularly take a step back, think about what products, services and solutions they will need in the future, and invest in those areas.
We believe that investing in and building our platform to meet client needs will enable us to deliver industry-leading organic growth (net new asset flows from clients), leverage scale to increase operating margins over time, and return capital to shareholders on a consistent basis.
Our long-term shareholder value creation framework was developed in close collaboration with our Board of Directors and our Board continues to play an active role in overseeing our strategies to deliver on the framework and in measuring our progress against it. At each of our full board meetings, which take place a minimum of six times per year and include at least one full session dedicated to firm-level strategy, BlackRock’s Board reviews our financial performance, as well as the high-level and business-specific strategies directed at driving our results. The Board fosters constructive debate with senior business leaders on their near and long-term strategies in the context of the markets, the regulatory environment and the competitive landscape in which we operate.
While our long-term value-creation framework has remained consistent over the past several years, we are constantly evaluating the ecosystem in which we operate to identify areas that might require us to pivot our strategy. For example, in response to market volatility in recent quarters, we have sharpened our focus on expense discipline and resource allocation to ensure our ongoing investment spend is optimized to achieve our long-term growth strategy.
In our strategic framework, we have set a firm-level organic asset growth target of 5%. We seek to achieve that goal by executing on our strategies across client businesses, which we anticipate will drive organic base fee growth in excess of 5% as growth in our higher-fee Retail and iShares businesses outpaces that in our Institutional business.
Drivers of shareholder value
Specifically, we are working to achieve:
- high-single-digit organic asset growth in Retail by enhancing our product set, focusing on an outcome-oriented approach to creating client solutions and more deeply penetrating distribution channels;
- low-double-digit organic asset growth for iShares by driving global market expansion and increasing our global market share as we pursue growth themes in client and product segments, including core investments, financial instruments, precision exposures and fixed income ETFs; and
- low-single-digit organic asset growth in Institutional, by deepening client relationships through a solutions-oriented approach, effective cross-selling and leveraging BlackRock Solutions’ analytical and risk management expertise.
We believe in scale as an important driver of operating leverage, and capitalize on it in areas including index-based investment strategies, brand building and our technology platform and associated Aladdin business.
Finally, we are committed to leveraging our cash flow first and foremost to invest in our business for growth, and then returning all excess cash to shareholders through a consistent and predictable capital management policy. We use our cash to seed and co-invest in our own products to facilitate time-to-market