BlackRock mustn’t mimic underperforming NYC pension funds

Crain's New York Business

Earlier this year, Blackrock CEO Larry Fink released his annual letter to CEOs, in which he called for a greater focus on “societal impacts” by the companies in which BlackRock invests. The lengthy letter went into considerable detail to explain the firm’s position, but failed to specify how this initiative will be carried out and what it means for the millions of hard-working Americans investing in BlackRock’s passive index funds.

But what is really behind this call to action? And why are passive-fund managers becoming active?

BlackRock’s newfound focus comes at a time when pension funds—such as the New York City Employment Retirement Systems and California Public Employees Retirement System (CalPERS)—are taking an increasingly aggressive position towards investments that align with social and political agendas, with returns often taking a backseat.

In New York today, the city’s contribution to its pension funds were $9.3 billion in fiscal 2017, up from $1.4 billion in 2002. The city’s budget will soon allocate more spending on pension costs than on social services (excluding education), while the funds are estimated to be at least $65 billion in the red, with a weighted average funded ratio of only 62%, or 10% below the national average. These are alarming figures.

Ironically, as the pension system struggles to meet its obligations, city Comptroller Scott Stringer is ramping up the funds’ focus on matters that on their face have little to do with performance and much more to do with public relations, submitting 92 separate shareholder proposals to 88 different companies in fiscal year 2017, the majority focused on giving large passive funds and pensions special status to elect directors and on social and environmental issues.

Stringer even stated in his inaugural address that he wants to “remake the office of comptroller into a think-tank for innovation and ideas” and recently came out in support of fossil fuel divestment at the city’s pension funds—another politically motivated move that could cost taxpayer billions.

The same can be seen at the nation’s largest public pension fund. CalPERS has increased its environmental and social investing and activism while converting a $3 billion pension surplus in 2007 to a $138 billion deficit today. CalPERS leaders have also taken an increasingly active public role, using the fund’s environmental and social platform to push a larger agenda on the world stage, all while struggling to meet its obligations.

Despite poor returns, these funds carry a large influence on companies like BlackRock that manage trillions in pension fund money, pressuring them to also take an aggressive stance on these issues. CalPERS, for instance, has paid BlackRock millions of dollars in fees and is negotiating with the company over management of the fund’s $26 billion private equity program. BlackRock also voted in support of a CalPERS-sponsored climate-related proposal for the first time in 2017.

These are no small matters for a company that manages roughly $6 trillion in assets, the large majority of which are passive investments meant to track an index for steady value creation, not to act as active managers to push political and societal agendas unrelated to returns.

Since BlackRock’s announcement, its CEO has made a number of public appearances but has yet to reassure those who have placed trust in his firm’s passive investment vehicles. After all, passive investors are looking to make gains based on the market, not pick winners and losers based on the social and political influences of mismanaged pension funds. Instead, the firm’s inability to share concrete details about the path forward creates more confusion for investors, who are worried what this new focus on “social impact” will mean for their retirement funds.

We all care about the environment and our own social causes, but an increased focused on issues that have no concrete connection to value has proven costly for the retirees who rely on their pension fund for their livelihood and the taxpayers that backfill their underperformance.

Now the nation’s largest passive investment fund is moving toward implementing the same types of policies as the pension funds that happen to provide it billions of dollars in business each year, and millions of everyday investors could be affected. Anyone with an investment account should take note.

Tim Doyle is vice president of policy and general counsel at the American Council for Capital Formation.