(Bloomberg) -- As President Donald Trump grappled with the coronavirus outbreak last month, he boasted at a press conference of tapping a secret weapon for advice: Larry Fink.
The chief executive of BlackRock Inc. provided insight to Trump on coping with the fallout from the pandemic -- and once again put his firm at center of a white-hot economic emergency.
BlackRock is no stranger to stepping in during a financial crisis cleanup. It played a similar role in 2008. But back then, it was a smaller firm with a focus on fixed income, closer to Pacific Investment Management Co., which had renowned money managers Mohamed El-Erian and Bill Gross at the helm.
More than a decade later, the investing landscape has shifted. BlackRock has a premiere role in helping the Federal Reserve stabilize markets. The central bank has hired the firm to help manage its economic relief efforts. Beyond U.S. borders, the Bank of Canada has called on the asset manager as it shapes its response to the meltdown.
BlackRock’s government connections reflect the dominance it has achieved in the asset management arena since the last financial crisis. It became the world’s largest asset manager with $6.5 trillion in assets -- a size and breadth that make the firm an essential player on Wall Street, in Washington, and beyond.
That may be an advantage amid the current tumult. “The companies that are going to come out in better shape are going to be the big businesses,” said Greggory Warren, an analyst at Morningstar Inc.
Financial crises can mark inflection points in investor preferences. After 2008, inexpensive index-based investing took off, buoying BlackRock, which holds about two-thirds of its assets in passive funds. Scale allows a massive firm like BlackRock or competitor Vanguard Group Inc. to offer prices that were once unheard of in the industry. Think U.S. stock-tracking funds that cost a few cents for every $100 invested.
“The one thing that rules in this world is cheap,” said Eric Balchunas, an analyst at Bloomberg Intelligence.
The economic recession following the 2008 crash helped set that tone. In the trenches of that contraction, investors became more comfortable using exchange-traded funds, which are tethered to indexes and can be bought or sold at any time in the trading day. Those funds hold about $4 trillion in the U.S., compared to about $531 billion in 2008, according to data compiled by Bloomberg.
BlackRock owes much of its dominance to a well-timed bet on those products. The firm got its start as a bond-focused shop, and had about $1.3 trillion in assets at the end of 2008. Today it is a formidable giant, overseeing about five times that sum. BlackRock first moved into ETFs with its purchase of Barclays Global Investors in 2009, a defining moment in the company’s history. The British bank sold the prized unit after rejecting U.K. government bailout money.
Moving into passive investing put BlackRock’s growth “on steroids,” Warren said. It is the world’s largest global issuer of ETFs today.
BlackRock’s government advisory business also cemented some crucial relationships in the fallout from 2008. BlackRock scored mandates to manage portfolios of toxic assets from Bear Stearns Cos. and American International Group Inc., playing to Fink’s roots in structuring mortgage-backed securities.
Today, BlackRock’s role is even more expansive. The Fed enlisted the New York-based firm to shepherd three debt buying programs. Canada’s central bank is bringing in BlackRock as an adviser in purchases of commercial paper, a form of short-term debt companies use to fund day-to-day expenses like payroll.
Beyond Covid-19-related mandates, the firm also won a contract to help incorporate sustainability into the European Union banking system.
“I do believe it’s going to continue to bring opportunities for us,” Fink said on an earnings call on Thursday, referring to BlackRock’s government assignments. He added he’s “very proud of” such work.
Another giant located across the country, Pimco, is reprising a role it played in the 2008 financial crisis too. The Fed once again called on Pimco as the investment manager for its purchases of commercial paper.
The Newport Beach, California-based firm oversaw $1.8 trillion at the end of the first quarter. In the intervening years since the last financial collapse, it has stuck to its original ethos as an active fixed income investment company.
Along with the rest of the active fund management industry, Pimco faced some challenges in an era when belief in star fund managers began to fade. One of the most dramatic examples of that arc was investing legend Bill Gross.
Gross, Pimco’s former chief investment officer, founded the Pimco Total Return Fund in 1987 and turned it into a behemoth. The fund had almost $300 billion in assets at its peak in 2013, and generated annualized returns of 7.8% from inception through his last day.
But when Gross left for Janus Henderson Group Plc in September 2014, an investor exodus followed. The fund suffered total redemptions of more than $100 billion in the 12 months after he departed.
Pimco spokesman Michael Reid responded to a request for comment on Gross by pointing to remarks from Morningstar analyst Eric Jacobson. “The firm didn’t flinch,” Jacobson said. “Pimco managed to keep performance competitive or better in most cases despite the outflows.”
“As an active manager, Pimco’s defensive positioning and liquidity management enabled us to navigate unprecedented market volatility,” Reid said in a statement. “We now see some extremely attractive long-term value in higher-quality segments of the investment-grade credit and mortgage markets as well as in more resilient areas of emerging markets.”
Gross was also known for his discursive investor letters that touched on topics like his dead cat and the eroticism of sneezing. In recent years, Fink’s annual missives have attracted similarly broad industry attention, albeit with a more staid style.
Proponents of active management argue that the industry gains additional edge in times of volatility. Though cheap index funds are easy to love when markets rise, active managers say they’re better suited to pick through the rubble after a downturn. (BlackRock has significant resources in active funds of its own, with $1.8 trillion in such strategies.)
Size and ties to governments put firms like BlackRock and Pimco, which is owned by German insurance giant Allianz SE, on stronger footing as the world navigates the unprecedented changes brought by the pandemic, said John Morley, a Yale University Law School professor who studies the regulation and structure of investment funds.
“The small asset managers may not have the resources to weather the storm,” he said.
(Updates with Pimco comment. An earlier version of this story was corrected to reflect spokesman referencing statement by Morningstar analyst.)
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