BlackRock's Larry Fink: Timing Is Key in the World of Alternative Assets

Larry Fink, who serves as both the chairman and CEO of the large asset management firm BlackRock, recently provided some relevant investment portfolio guidance. annual letter To investors, in that correspondence, Fink suggested an alternative approach to the conventional 60/40 equity-debt portfolio, particularly 50% equities, 30% fixed income securities, and 20% alternative investments .

Private assets? These are sometimes called alternative assets too. They differ from publicly traded ones like stocks and bonds. This group encompasses private equity, hedge funds, private credit, and real estate—essentially anything not listed on a public exchange. Historically, these types of investments were accessible exclusively to institutional and wealthy individual investors.

Fink’s recommendations aligned with a recent study published by the National Bureau of Economic Research (NBER) about the returns from private equity investments.

The NBER research revealed an opposite connection between the scale of private-equity funds and their performance. The researchers were straightforward with their findings: "Bigger funds undertake bigger transactions, which yield poorer outcomes."

The research underscored the difficulty investors encounter when attempting to implement Fink's recommendations. Generally, alternative asset funds boasting strong long-term records tend to grow significantly, which often leads to potentially subpar future performances.

Instead, consider putting money into smaller and newer funds, which inherently come with less history to evaluate. Assessing which of these lesser-known, younger, and smaller funds hold potential isn't straightforward; despite thoroughly researching to uncover these under-the-radar options, predicting their ability to deliver exceptional performance remains uncertain.

It's difficult to envision how BlackRock can avoid this dilemma as it aims to provide individual investors with access to private assets. The more assets the company draws into the different investment vehicles it establishes, the greater emphasis it must place on bigger and bigger deals.

Examine the historical performance of different BlackRock funds that target private assets. The company’s iShares Listed Private Equity UCITS, intended for European investors, yielded an annualized return of 12.0% in U.S. dollars up until December 2024, contrasting with the S&P 500’s total return of 13.1%.

The BlackRock Private Investments Fund, accessible solely to institutional investors within the U.S., also trails behind the S&P 500. Despite having a shorter track record than the European UCITS fund, it achieved an annualized return of 6.8% over the past three years up until 2024, falling short when compared to the S&P 500’s 8.9%.

Falling short of the S&P 500 does not necessarily spell doom. For instance, a private-equity investment that shows low correlation with the U.S. stock market could still serve an essential function within a well-diversified portfolio, potentially outperforming the S&P 500 when measured by risk-adjusted returns. However, it remains uncertain whether these conditions apply in this case. To illustrate, the correlation coefficient between the S&P 500 and the BlackRock European UCITS fund over the past ten years stands at 96%, indicating near-identical movement patterns. Despite this high correlation, the fund exhibited volatility levels that were 52% higher compared to those of the S&P 500 during the same period.

Fever pitch

BlackRock might be motivated to heavily invest in private assets for another reason as well.

According to a 2023 study published in the Review of Financial Studies, BlackRock might be motivated to heavily invest in private assets for reasons beyond mere financial gain. There has been a significant surge in demand for alternative investment options over recent years, and this trend gives the company an opportunity to capitalize on increased interest by introducing new high-fee products.

The study, entitled “ Competing for Focus in the ETF Sector The study mentioned above was carried out by Itzhak Ben-David from The Ohio State University, Byungwook Kim from the University of California Irvine, Francesco Franzoni from the University of Lugano in Switzerland, and Rabih Moussawi from Villanova.

In his email, Ben-David contended that grasping the fluctuations in investor mood swings is essential for comprehending why investment companies like BlackRock introduce specialized and pricier financial products at certain times.

For instance, during the upward swing of this cycle, investors' optimism grows with positive developments and tends to become increasingly bullish as they project short-term successes indefinitely into the future until ultimate euphoria sets in. This is typically when exchange-traded fund issuers introduce their niche ETFs, according to Ben-David—right at the onset of the downward turn in the sentiment cycle.

In line with this idea, there has recently been an increased focus on private assets. The graph shown indicates a consistent rise over the last fifteen years, with a notable acceleration in this growth more recently. By concentrating on private markets, BlackRock might indeed be following rather than leading trends.

Mark Hulbert frequently contributes to GudangMovies21. The Hulbert Ratings monitors investment newsletters that undergo auditing for a fixed fee. You can contact him at mark@hulbertratings.com

More: The annual letter from BlackRock CEO Larry Fink has been released, but what stands out the most is what he left unsaid.

Plus: Larry Fink suggests a different approach to the 60/40 portfolio strategy, which would result in higher costs.