3 Takeaways - Building the Largest Asset Management Firm in the World: Co-Founder & Former Vice Chairman of BlackRock Barbara Novick (#63)

Episode Date: October 19, 2021

Co-founder of BlackRock Barbara Novick shares how she and her co-founders built the largest investment management firm in the world with $9 trillion under management and clients in over 100 countries. Learn the keys to BlackRock’s success. Barbara transitioned from Vice Chairman of BlackRock to Senior Advisor in 2021.

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hey, everyone. It's Lynn Thoman. Welcome to another episode. Today, I'm delighted to be with Barbara Novick. She's a co-founder of BlackRock, the largest investment firm in the world with over $9 trillion under management and clients in over 100 countries. To put $9 trillion in perspective, it's more than the annual GDP, the annual gross domestic product of all countries in the world, except for the U.S. and China. And it's larger than the combined GDP of Germany and Japan.

It is also larger than the market value of Apple, Amazon, Facebook, and Google combined. Barbara has just transitioned from vice chairman to senior advisor of BlackRock. I'm excited to find out how she and her co-founders built the largest asset management firm in the world and what the keys to BlackRock's success are. Welcome, Barbara, and thanks so much for our conversation today. Thanks, Lynn. Happy to join you. It is a pleasure, Barbara. Barbara, how did you come to start BlackRock? Did you have any idea

you were going to build the largest asset management firm in the world? It's interesting. When you look back, 1988 is when we started, and there were eight of us, and we had an idea. And the idea had to do with managing complex fixed income securities at the time, mostly mortgages and asset-backed securities. And it was kind of a niche strategy to look forward and predict that we would grow to be the largest in the world. Not a chance. Would we hope to grow and be successful and certainly sustain ourselves as a business? Yes. But no one had any idea how this would actually evolve over time. Eight is a whole lot of founders. How did you all function together? Was it good to have a

lot of founders? I think eight was actually really good. From the outset, we were a partnership. And there were some other firms that started around the same time that had different structures, and they didn't succeed. So it's both a combination of who we had, and the dynamics between us. But then also the idea that it was a real partnership, we were in it together. We're all sort of rowing in the same direction, if you will, but with very different personalities and different perspectives, which is healthy, and debate at various points in time of directions and key decisions to make. And what was your initial plan like? The initial plan fit on one of the partners.

His kid had an easel, one of those little tight art easels. And it said, manage fixed income portfolios, advise companies that have fixed income portfolios, and raise capital to invest in companies whose primary business involves fixed income portfolios. raise capital to invest in companies whose primary business involves fixed income portfolios. So that's kind of a code word for insurance. But basically, that was the business plan fit on one big piece of paper. Wow. And that's very simple. Did you stay focused on a narrow area or how did you think about diversifying and did that focus change over time? a very narrow niche. And while that was a great door opener and a great way to start a business in terms of foundation, that we needed to have corporate bonds and over time municipal bonds, and then high yield and non-dollar and all these other fixed income asset classes. And the thought

was very simple. Mortgages were kind of a hot area at the time we were starting and they were complex. A lot of people didn't understand them and we did. And that gave us the opening. But over time, our clients were going to change their needs. And if somebody wanted to switch, let's say, from a mortgage specialty mandate to more of a core bond or broad-based fixed income mandate, if we didn't have that capability, that meant they'd leave us. If we had that capability, they might cancel one mandate and morph it into a different mandate. And that's exactly what ended up happening. So we diversified really just a few years into the business and over time built out a full spectrum fixed income. We stayed fixed income for a long time.

It was probably about the 10-year mark where we really started to move into other asset classes, partly as a result of us joining PNC Bank. And how did you view change? I'll jump ahead to the end, but I'll give you a taste here. Embrace change. I think that's a common theme from day one of our firm is you might make some mistakes along the way. You have to course correct from those. But overall, embrace change. Look at strategic opportunities in terms of acquisitions, or in the case of selling

the company to PNC, look at new asset classes, look at new markets, look at changes, commercial mortgage-backed securities became a thing. We got involved in those fairly early. Even today, looking at the ESG space, we were one of the earlier participants in looking at sustainability and different aspects of sustainability. So always looking forward, trying to figure out what's next in the markets and technology and in customer preferences. And what products do you now offer? Everything. If it's investable, chances are we offer it. So I think you have to look at it from who are our clients.

And our clients fit in multiple categories. So a tremendous percentage of the money that's managed at BlackRock is for retirement. But retirement includes pension plans. It includes individuals and IRAs. It includes 401k plans. It includes even insurance, annuities and things like that. So there's a lot of different preferences for those different types of investors, even within the retirement space. And that then trickles down. So it's both the asset classes and the different ways of combining them that might matter. But then it's also, can you offer it in an investable format? So a mutual fund or brand of mutual funds, or a private fund, or a separate account. So there's a lot of different ways of delivering investment

products to people. And today, we have everything from mutual funds to ETFs to you name it, and across the different asset classes, and a growing presence in the private market, infrastructure, private equity, things like that. How did you view public policy? And how did you deal with it? So the first 20 years, we didn't really do much with public policy. We kind of deferred everything to the sell side, and it worked just fine. And then after the great financial crisis, we were concerned that there would be a wave of new rules. And it was important for investors to have a seat at the table. And so we established a public policy group, I basically

stood up a group to become a voice of investors on behalf of our clients. And we again, similar to the rest of our business, embrace change. We didn't look at regulation and say, oh, that's a bad thing. We said, let's make sure there is new regulation that is good for investors. So that's how we went into it. A lot of market structure issues, many of which we supported and helped shape. How did you think about technology? Technology from day one, big for us. So when you looked around, we initially thought, as many startups do, that you buy, not build.

So we went out, and we were going to raise a mutual fund, and we needed a custodian. And we thought, well, let's see what systems are out there. We need a portfolio management system, we need custody, we need a lot of things. And everyone showed us what they had and told us what they could do. And for basic custody, that was pretty straightforward. But for portfolio management systems, there really was nothing that did what we wanted. We wanted something that would tell us real time our positions, how they compared to the benchmark that we were measuring against, how much cash we had. We had a whole lot of requirements. And we were shocked that that system wasn't there.

So instead of buying, we were forced into a position of building. And that was actually the birth of what is today our BlackRock Solutions or a lab business. And we've been a leader in technology for asset management. We expanded it and decided to offer it externally, even to competitors. And that decision, which was again, a decision that got a lot of conversation internally. But at the end of the day, that was the direction we decided to go. And it's been a very good one. And it's been very influential, I think, in the business. Yeah, it's so interesting to me, because the big US multinational banks still don't have that kind of a technology system that provides all the information that you all do in such a customer-friendly format.

Yeah, I can't comment on what other people have or don't have. I don't get to see those systems. But I know our system has been designed both to be usable as a portfolio manager, but also it was initially designed that portfolio management, client service, people interface with custodians, everyone throughout the firm would have access to the same information on the client portfolios. And then over time, we gave clients access to their own portfolios to be able to see information. And it was a very powerful thing. Today, you know, you can get things on your smartphone, you can get it on a smartphone, you can get it on a

tablet, you know, so much has gone into the client experience and trying to refresh that and stay up with new technology as one of the key platforms. But then also using technology for what we call operational excellence, and reducing errors and things like that. And sometimes for investment ideas. So artificial intelligence and machine learning and taking large data sets and coming up with kernels of insights from those, those are all integrated into the systems. How did you think about marketing? For a firm the size of BlackRock, it is remarkable that many people at the retail level don't know the firm. How did you think about marketing in the beginning and how did that evolve? At the beginning, we took the approach that we should stay under the radar.

We didn't have any marketing professionals. We didn't have a PR department. We weren't a public company. And we took a very low-key approach. It whether we spoke with them or not. So we started to engage a bit more. Today, of course, there's a whole PR department, as well as a marketing department. And we do things in multiple languages, very much pushed out to the different marketplaces. And it's a much more proactive approach. But the original one was to do as little as possible. And then we sort of grew into it as our business evolved, public company, more retail products, more retail shareholders. Today, I think a lot of people have heard of us and are aware of us. Were acquisitions important for BlackRock success and growth? Acquisitions were very important.

We were very much a fixed income shop. When we joined PNC, we had sister subsidiaries that did equities. And then over time, they asked us to take those, buy those into our company and actually manage those companies. So that was our first sort of dip our toe in the water for equities. And we realized pretty quickly that we didn't have enough size to be effective.

And we had kind of an odd product mix just because of the nature of the pieces that came to us through that system. So we ended up buying State Street Research and Management up in Boston from MetLife. And that took us to a different level. We had a lot more, or I'll say, sort of normal broad-based strategies, things people were looking for, in addition to the niche strategies that we'd gotten through PNC. And even that we didn't feel was big enough or broad enough. And when we bought Merrill Lynch Investment Management, that was another game changer. So really took us to a point of scale in mutual funds, in equities, to a product mix that was much more appealing to a much broader set of clients. And then I would say, you know, the final acquisition really being BGI and that taking us into index investing in addition to active, but also giving us the ETF product line. So today we've got a mix of kind of every specialty, you know, every sector,

healthcare and technology, and all sorts of niche things, and also many regional products and a really good mix. And how did you think about local versus global? Local versus global is key on multiple dimensions. There's clearly the client dimension, but there's also today a very strong regulatory dimension. So if you look, let's say, take ESG as an example, since it's very current, there are rules coming out that are EU specific, there are rules in different markets in Asia, in Japan, in China, in Australia, all over the region. And then in the US, you had a different set of rules.

So you have to be able to, number one, comply with all the rules. That's always a given. But in today's day and age, preferably try to engage early so that you can be involved in shaping those rules and you can provide some practical input. The practitioner's perspective is important and the investor perspective is important. So that's really what we set out to do. And today, I think it's really quite apparent how much you need to have that local aspect. For environmental social governance, ESG, you were one of the first to focus on ESG. What do you think is next? What's next? I don't think ESG is anywhere near done. I think, you know, we set out and the pillars that I looked at and tried to encourage was number one, company reporting. You know,

without good data, I don't even know what we're talking about, right? And it's not so easy to get good data on many companies. So we focused very early on SASB as a reporting standard. Of course, they've now gone through a couple of iterations, but just getting some globally accepted standards for companies to report, that's a fundamental building block to everything else. The second thing we talked about, and we put out reports on this, was that there should be a common language. We call it taxonomy, but really language for how you talk about ESG, how do you label products? How do you position products? Because one person might say ESG is no tobacco. Somebody else might say it's no carbon. Somebody else might say it's the best ESG scores from MSCI in a particular sector, in which case carbon intense industries are included. So just defining

it, and you're seeing right now a lot of stories about greenwashing and truth in advertising and whatever else. But part of that is that the lack of a common language makes it very difficult to ascertain what are different products and are they doing the things you think they're doing or not doing. And then the third component of that is reporting at the portfolio level. So for example, all of our ETFs, we put out a template that we report on the contents of that portfolio and many of our mutual funds as well. And the goal was to get to 100% of our funds. So I think the regulators need to start with those basics. I hope that they will. And then see where you want to go from there. But I don't think

we're anywhere close to done on that topic before we look at next topics. There's also a lot of work being done on technology, the use of technology, outsourcing, the use of AI, what biases might be in models, things like that. So I expect there'll be another wave of regulation in that direction beyond the obvious of data privacy and issues that have been out there a while. What other decisions were important for BlackRock's success? I think the technology and the diversification and the decision to over time go more local were probably three of the most important. And the go local, it's not something we decided yesterday. It's something

we decided 10, 15 years ago, and has put us in a good position for what world we see today. Looking from the outside, it looks like BlackRock has made perfect decisions over its whole life. But did BlackRock make any big mistakes? And if BlackRock did, how is the firm able to recover from them? I think the most renowned mistake was a big investment in Peter Cooper Village, Stuyvesant Town, right before the financial crisis, a leveraged real estate play, which we invested both our own money and we marketed a fund to clients to invest. And that did very poorly.

The financial crisis crushed real estate, leveraged financial instruments were not a good timing and recovered. I think hopefully we learned our lesson in terms of concentration risk and the size of investment and the use of leverage and all those kinds of things. But the timing couldn't have been worse in an asset class that really got crushed. That was in New York, wasn't it? Yes. Yes. Okay. Was there anything special you did with your clients during or after that?

No, I mean, I think they understood it had risks. And obviously, we invested our own money. And we thought it was a good deal for them and for us. And clearly, it did not work out that way. But I do think we learned a lot from it. And, you know, just the financial engineering, the deal structure, in hindsight, probably could do better. As you look ahead, what trends do you see in finance and in asset management? You mentioned ESG. Are there others?

I think there's a growing focus for regulatory scrutiny on the asset management industry on a whole range of topics. And that leads to some need for scale. I mean, the amount of reporting that is required today versus where we were 10 and 20 years ago is enormous. The amount of compliance work, the use of derivatives, the reporting of derivative use by fund, by firm, so many different categories of reporting money market funds. So I think the need for technology to manage it all, the need for scale to be able to cover those costs, I think there's a whole bunch of trends that are going to come together in a related way and drive the business over time. I think you will

see consolidation. It's almost like a barbell. You either have to be a really small boutique or you have to be really quite substantial size firm. If you're in the middle, you're kind of squeezed, you need to find third parties, you can outsource the regulatory reporting or some aspects of it. People talk about reg tech, there's a lot of third party providers that have stood up businesses, so some business opportunities there. But there's a lot of change coming. Before I ask you for the three takeaways you'd like to leave the audience with today, is there anything else you'd like to mention that you haven't already talked about? I think a lot of it is about the people, right? So the original eight, we had eight

fantastic people. And many of us stayed very active in the firm. I retired earlier this year. That leaves still four very active full-time employees on our management committee, plus somebody who is on our board. And it's been a really interesting period when you think about it for 30 plus years, that many people to stay together as partners, I think that's been critical. And then bringing in other people and welcoming them and building

that management team to be broader than the original eight. So some of them through acquisitions and staying with the company, some of them coming in just laterally. It's a very, very strong management team and a culture that really emphasizes career development and young leaders and things like that. So I think that aspect is a critical one. It's all about the people. What you've done is extraordinary to build a $9 trillion asset management firm, and to keep the team together and do it so successfully. So congratulations. Thank you. Barbara, what are the three takeaways that you'd like to leave the audience with? So my top three would be integrity, relationships, and embracing change. And if I just expand on each of those a little bit,

there's definitely a right and wrong. And most people know where that line is. There's not that many gray things. And being willing to speak up, have a contradictory view, not necessarily be confrontational about it, but not go with the flow. That's a mark of somebody who's confident without being overconfident. And I do think that that whole integrity, building a reputation, always harder to build and easy to destroy and something that just has to be right top of mind in all the decisions. The second one in terms of relationships, putting yourself in someone else's shoes, listening to what their concerns are, whether it's with clients or later on in my career with policymakers, it's not about saying yes or no.

It's about understanding the why, the reasoning, and then being able to deliver the best solution. And sometimes it's not the solution they started from that they thought they were looking for. And I'll give a simple example. I had somebody who told me they were going to be looking for a trade entry system and a risk management system. And they were thinking of those as two separate things. And I said to them, well, that's really interesting. We're now starting to offer Aladdin externally, and it is both a trade entry system and a risk management system. Is that something you'd consider? But knowing what they were looking for and how they were going about it gave an opportunity to show them a different path, which they then actually ended up pursuing. So it's

really, it's with clients, it's with employees, it's with really everyone. And then lastly is embracing change, as I mentioned earlier. And it's in everything. It's in changes in the market, it's in changes in society. When I look at what the standards are today of acceptable behavior versus 40 years ago, it's really quite a generational change. It's about finding solutions and really embracing what's next, not so much looking back and pining for the past. I think at the end of the day, that builds resilience. And that's what we need right now. We need people who have the empathy, but also have the resilience. But those are my top three.

Barbara, this has been wonderful. Thank you so much. Thanks, Lynn. Really enjoyed being with you today. Me too. If you enjoyed today's episode, you can listen or subscribe for free on Apple Podcasts or wherever you listen. If you would like to receive information on upcoming episodes, be sure to sign up for our

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