Insight from the world’s biggest asset manager
Larry Fink, CEO of the world’s biggest asset manager, BlackRock (with over $10 trillion of funds under management), has been very vocal about the digitization of assets, stating that “the next generation for markets, the next generation for securities, will be tokenization of securities.”
Source: X
But, there is the old saying that “actions speak louder than words.” Well, BlackRock is translating words into actions when it comes to embracing blockchain-powered assets. And, intriguingly so; it has launched two products recently which, arguably, are juxtaposed, being at different ends of the risk spectrum. The first of these has been an ETF investing in Bitcoin which has become the fastest growing ETF in history. The second is the announcement that BlackRock is digitizing its USD Institutional Digital Liquidity Fund as it aims to tokenize £10trillion of assets. The success of the BTC ETF has also been helped by the value of Bitcoin increasing since the beginning of the year by 54%, compared to the S&P 500 which has increased by 10%. The price of Bitcoin has been written about on numerous occasions and its price has been very volatile but, in turn, investors have been rewarded sufficiently enough to compensate for all those zigs and zags i.e. ups and downs.
Source: TeamBlockchain
The Sharpe ratio is a formula by which institutions measure different investments/portfolios to assess if they are achieving a good risk adjusted return. The S&P 500 has a long-term Sharpe ratio of 0.62, compared to Bitcoin’s Sharpe ratio of 3.44. So, little wonder that BlackRock wishes to invest some of its Strategic Income Opportunities $35.5billion bond fund into Bitcoin. Yes, a fund that predominately holds debt instruments is now destined to also be exposed to Bitcoin, presumably in the hope that Bitcoin (whilst undoubtably volatile) will continue to perform well on a risk-adjusted basis. Furthermore, it ought to come as no surprise that it is not only BlackRock which has launched ETFs investing in Bitcoin - a number of other global asset management firms are also digitizing their funds. So, what other insights did Larry Fink offer in his 2024 letter to investors? Well, this year’s topic for Fink was: “Time to re-think retirement”. One very simple message from it was to begin saving (and save early) in order to benefit from the effects of compounding returns; a mistake many investors make is that their regular savings are often allocated in the same way as any lump sum they have accumulated. And, as Fink pointed out: “Arguably the biggest barrier to investing for retirement - or for anything - is fear….In China, where new surveys show consumer confidence has dropped to its lowest level in decades, household savings have reached their highest level on record - nearly $20 trillion - according to the central bank. China has a savings rate of about 30%. Nearly a third of all money earned is socked away in cash in case it’s needed for harder times ahead. The US, by comparison, has a savings rate in the single digits. America has rarely been a fearful country. Hope has been the nation’s greatest economic asset. People put their money in American markets for the same reason they invest in their homes and businesses - because they believe this country will be better tomorrow than it is today.” Meanwhile, as opposed to having all their eggs in the same basket, investors may wish to consider a strategy whereby their regular savings are allocated to those volatile assets such as emerging markets or cryptocurrencies. Then, as their portfolio accumulates, they could transfer some of their funds and invest in a more diversified portfolio of equities, bonds, real estate, etc. The chart below indicates the returns that could have potentially been achieved had just $25 per week been invested into Bitcoin over the last five years.
The result of investing $25 a week for 5 years into Bitcoin
Source: Dcabtc
Fink had also looked at the impact of $1,000 invested in the S&P 500 in 1960 which, 30 years later, would have been worth nearly $20,000: “That’s more than double what they would have earned if they’d just put the money in a bank account. In finance, there are two basic ways to get or grow money. One is the bank, which is what most people historically relied on. They deposited their savings to earn interest or took out loans to buy a home or expand their business. But over time a second avenue for financing arose, particularly in the US, with the growth of the capital markets: publicly traded stocks, bonds, and other securities.” And, as Fink further pointed out, there are two challenges facing many countries: “The first is providing people what my parents built over time - a secure, well-earned retirement. This is a much harder proposition than it was 30 years ago. And it’ll be a much harder proposition 30 years from now. People are living longer lives. They’ll need more money. The capital markets can provide it - so long as governments and companies help people invest. A second challenge is infrastructure. How are we going to build the massive amount the world needs? As countries decarbonize and digitize their economies, they’re supercharging demand for all sorts of infrastructure, from telecom networks to new ways to generate power. In fact, in my nearly 50 years in finance, I’ve never seen more demand for energy infrastructure. And that’s because many countries have twin aims: They want to transition to lower-carbon sources of power while also achieving energy security. The capital markets can help countries meet their energy goals, including decarbonization, in an affordable way. We focus a tremendous amount of energy on helping people live longer lives. But not even a fraction of that effort is spent helping people afford those extra years.”
Unsurprisingly, this is where education plays a vital role in finances - which is equally true when it comes to understanding the transformational potential of different technologies. A recent article in Digital Bytes explored how e-Toro is experimenting with augmented, virtual and extended reality, so helping to make investing more engaging: imagine that, instead of spending hours reading about where to invest and looking at past performance and fund documents, you put on a head set and dive into the metaverse where the funds, and even the companies that a fund invests into, makes your research more immersive. In addition, when it comes to investing, you do so not by writing a cheque but by using your digital wallet to buy or sell the funds 24/7, as opposed to the current situation where typically you can only buy or sell a fund once a day. Hence, it is easy to see why asset managers such as BlackRock, Abrdn, Franklin Templeton and Amundi have already tokenized some of their funds. In theory at least, they are able to be traded in a virtual world - as well as being available on today's fund platforms and searched for in a newspaper. Other asset managers such as T-Rowe Price, Citi Group and Fidelity are also trialling how to use blockchain, with Schroders’ CEO, Peter Harrison, stating that: “blockchain will be hugely disruptive over the next 5-10 years.” Meanwhile, back to Larry Fink’s 2024 letter to investors which also raises a variety of other topics, such as:
· Should the retirement age be 65 or reviewed every 10 years in the same way that the Dutch do, depending on citizens’ life expectancy?
· How do we encourage people to save, given nearly half of Americans aged 55 to 65 reported not having a single dollar saved in personal retirement accounts.
· 25% Americans do not have $400 to spare to cover an emergency such as a car repair or hospital visit, yet studies show that when people have emergency savings, they are 70% more likely to invest for retirement.
· No one is born a natural investor.
· In Australia, the Superannuation Guarantee was launched in 1992 - now Australia has the world’s 54th largest population, but the 4th largest retirement system.
· Arguably, the biggest barrier to investing for retirement - or for anything - is fear.
· In finance, we sometimes think of “fear” as a fuzzy, emotional concept - not as a hard economic data point. But that is what it is. Fear is as important and actionable a metric as GDP. After all, investment (or lack, thereof) is merely a measure of fear because no one lets their money sit in a stock or a bond for 30 or 40 years if they are afraid the future is going to be worse than the present; that is when they put their money in a bank, or underneath the mattress.
· Compared with 20 years ago, the current cohort of young Americans is 50% more likely to question whether life has a purpose. Four-in-ten say it is “hard to have hope for the world.”
· Perhaps the best way to start building hope is by telling young people: “You may not feel very hopeful about your future. But we do. And we’re going to help you invest in it.”
· The future of infrastructure is public-private partnership.
· Debt matters: historically, the US has paid for old debt by issuing new debt in the form of Treasury securities. It is a workable strategy so long as people want to buy those securities but, going forward, the US cannot take for granted that investors will want to buy them in such volume or at the premium they currently do - around 30% of US Treasury securities are held by foreign governments or investors.
· Energy transition is a mega force, a major economic trend being driven by nations representing 90% of the world’s GDP. With wind and solar power now cheaper in many places than fossil fuel-generated electricity, these countries are increasingly installing renewables; it is also a major way to address climate change.
· Following the invasion of Ukraine, the UK, Norway and EU have spent €800billion subsidizing its citizens’ energy bills.
· Decarbonization and energy security are the two macro-economic trends driving the demand for more energy infrastructure.
· Clients are building portfolios that seamlessly combine both active and index strategies, including liquid and illiquid assets, also spanning public and private markets, across ETF, mutual fund and separate account structures.
In essence, Larry Fink's insights from BlackRock shed light on the shifting landscape of asset management towards digitization, with BlackRock embracing blockchain technology through products such as a Bitcoin ETF and tokenized funds. Fink further highlights the need for investors to adapt to evolving markets and his letter underscores the importance of early savings, the impact of fear on investment decisions and the challenges posed by global trends such as increasing life expectancy and energy transition. Fink's reflections certainly prompt contemplation on retirement planning, savings habits and the role of fear in financial decisions, urging investors to adopt diversified portfolios and forward-thinking strategies in a rapidly changing world.