BlackRock changes the subject

One thing to start: Farewell to John “Mac” McQuown, the true father of passive investing, who has died aged 90. It was McQuown’s “combination of bullheadedness and brilliance” that proved the crucial driver of the first entirely passive, index-tracking investment fund’s birth in 1971, writes FT Alphaville.

And another thing: HPS finds itself as one of the most sought-after assets in one of the most sought-after markets. Don’t miss this in-depth tale of how a former Goldman Sachs banker built a $10bn private credit “whale” — and now may sell it to a certain large US asset manager …

In today’s newsletter:

• BlackRock wants to talk about retirement. Climate, not so much

• Tech boom forces US funds to dump shares to avoid breach of tax rules

• Investors clamour for funds that exclude China

BlackRock changes the subject

More than two years after BlackRock ran into a buzz saw of criticism from US conservatives over its advocacy for sustainable investing, the world’s largest money manager is attempting to change the subject, writes Brooke Masters in New York.

Chief executive Larry Fink has not used the word “climate” on an analyst call since January, and he mentioned climate, sustainability or the word green just eight times — out of 11,000 words — in his closely watched annual letter in March.

These days, the $11.5tn asset manager is working hard to highlight its pension and infrastructure offerings. Fink headlined the March letter “time to rethink retirement” and used variations of the word “retire” 98 times. Back in 2020, he mentioned retirement just twice in his letter to clients, while sustainability and related words appeared more than 60 times.

BlackRock has been advertising its work on retirement in high-profile American political and financial newsletters, including campaigns this month in Semafor and the Financial Times’ sister publication Ignites.

The group has also been talking extensively about its plans for Global Infrastructure Partners, the alternative asset manager that it purchased for $12.5bn earlier this year.

“It is a practical repositioning . . . an adaptation to a very US context,” said Pierre-Yves Gauthier, founder of research house AlphaValue.

BlackRock said it was merely responding to what it heard from clients. The group reported record inflows and assets under management for the third quarter, and the share price hit an all-time high earlier this month.

“We focus our global business on the topics that are the most important to our clients and we evolve in anticipation of our clients’ needs. Over the past five years, these have included sustainability, retirement and infrastructure, among others,” BlackRock said, adding that it had received nearly $2tn in net new business over that period.

Tech boom forces US funds to dump shares to avoid breach of tax rules

This year’s lopsided stock market rally has made it very tricky for active fund managers such as Fidelity and T Rowe Price to outperform surging indices. It has also created another challenge: tax compliance. 

In this article, my colleagues Nicholas Megaw and Will Schmitt in New York explore how large investment funds are being forced to offload shares to avoid getting into trouble with the US tax authorities, as the rally has pushed them up against strict limits requiring them to maintain diversified portfolios. 

The Internal Revenue Service requires that any “regulated investment company” — which includes the vast majority of mutual funds and exchange traded funds — keep the combined weight of large holdings to less than 50 per cent of their overall portfolio. A large holding is anything that accounts for more than 5 per cent of assets.

Historically, the limit has mainly been a concern for specialist managers that run explicitly concentrated funds, but recent gains for the largest US tech companies means stockpicking investors that want to take even a slightly overweight position relative to an index in companies such as Nvidia and Microsoft are in danger of breaching the rules.

The trend highlights the unusual nature of the recent market rally, which has driven the S&P 500 and other indices to near-record levels of concentration. Just five large companies — Nvidia, Apple, Meta, Microsoft and Amazon — have contributed about 46 per cent of the year-to-date gains for the S&P 500.

“It’s a very difficult situation for active managers,” said Jim Tierney, chief investment officer for concentrated US growth at AllianceBernstein. “Normally having a position at 6 or 7 per cent of your portfolio is as far as most portfolio managers would want to push it for a business you have real conviction in. The fact that would now be a neutral weight or even underweight, it’s an unprecedented situation.”

Chart of the week

Investors are piling into emerging market funds that exclude China despite a recent blistering rally in Chinese stocks, amid concerns over escalating tensions between Beijing and the west.

Investment firms said that clients increasingly saw the world’s second-biggest economy as too large or risky to manage alongside other developing economies such as India, leading to one of the biggest shifts in emerging markets investing in decades.

Franklin Templeton became the latest manager to launch a so-called ex-China emerging markets vehicle on Tuesday, adding to a class of funds that has increased assets by 75 per cent this year to more than $26bn, according to data from Morningstar.

“When investors are keen to avoid a certain sector or region, the industry is happy to oblige,” said Michael Field, European equity strategist at Morningstar. “This has certainly been the case with funds that have excluded China from their make-up.”

China is classed as the world’s largest emerging market, with its companies making up a quarter of a benchmark MSCI index for developing-economy stocks.

That weighting is down from a peak of more than 40 per cent during the Covid pandemic. But it is still considered too large by many investors concerned that it is drowning out exposure to more promising economies, or is saddling them with risk over tensions between China and the west.

This has led to “what is essentially a new asset class” as investors carve out Chinese stocks into separate allocations and build portfolios that allow greater exposure to India, Taiwan and other markets, said Naomi Waistell, a portfolio manager at Polar Capital, which also has an ex-China fund.

Ex-China equity funds have received $10bn of net inflows so far this year, according to JPMorgan — outstripping the total amount of money that has gone into broader emerging market equity funds. The number of such funds globally has nearly doubled to 70 in the past two years, according to Morningstar data.

Five unmissable stories this week

Franklin Templeton is battling the worst quarter for outflows in its history, as reputational damage and poor returns spurred tens of billions of dollars of withdrawals from its fixed-income business Western Asset Management.

Millennium Management is considering launching its first fund since it was founded more than three decades ago in a bid to target less liquid assets, including private credit.

Commercial property’s moment of truth. Interest rates have peaked and activity in several sectors is picking up. Is the storm now over for the battered commercial property sector, or is the worst yet to come? 

The ultimate guide to carried interest: private equity’s tax break. The lower-taxed performance fee has helped buyout firms’ executives amass personal fortunes and is now facing a clampdown from the Labour party.

Aware Super, one of Australia’s largest pension funds, and property group Delancey plan to invest up to £1bn in central London offices in a big bet on a sector hit by high interest rates and questions over post-pandemic demand. 

And finally

Tim Burton grew up in Burbank, California, a homogenous suburban American neighbourhood so bland that it compelled him to escape. The Design Museum in London is the final stop on the tour of a major exhibition of 500 drawings, paintings, photographs, sketchbooks, moving-image works, and sculptural installations. Immerse yourself in Burton’s fantastical world.