Larry Fink: People forget the actual size of passive investing

Senior Writer
Yahoo Finance

People often like to talk about how passive investing is taking over the investing world. But BlackRock (BLK) CEO Larry Fink says this just isn’t so.

“The flows are large, but passive represents globally about 20% of the overall equity markets,” Fink told Yahoo Finance Editor-in-chief Andy Serwer in an interview at UCLA. “Today in the United States it’s 30% and elsewhere it’s 10%. It’s still not that large yet and people are blowing it way out of proportion.”

According to Fink, plenty of firms, including BlackRock, are getting positive flows into active funds. “There’s room for both” types of investing, he says, though passive (or funds that track indexes like the S&P 500) will continue to see more money unless the fees for active come down.

Traditionally, active funds have significant downside because their fees mean performance has to beat the market (or their particular benchmark) by the cost to invest make active worthwhile. But if those fees come down, Fink says, active will get some of its mojo back.

FILE PHOTO: Larry Fink, Chief Executive Officer of BlackRock, takes part in the Yahoo Finance All Markets Summit in New York, U.S., February 8, 2017. REUTERS/Lucas Jackson/File Photo
FILE PHOTO: Larry Fink, Chief Executive Officer of BlackRock, takes part in the Yahoo Finance All Markets Summit in New York, U.S., February 8, 2017. REUTERS/Lucas Jackson/File Photo

“Until many active managers lower their fees, so they can prove they can outperform [index funds] after expenses, they’ll see more inflows than the passive,” Fink said.

Part of the reason passive investing has become so popular, according to Fink, is that active managers are embracing passive investing in active portfolios. For example, an active fund could be comprised, at least partly, of active funds. “That’s another thing people are missing: You could actively manage and navigate those exposures by using passive instruments,” he said.

Misunderstandings and controversies aren’t new to passive investing or Blackrock’s relationship with it.

“When we bought BGI [Barclays Global investors, buying with it passive iShares] in 2009, most people said that was a bad transaction that nobody can have active and passive in the same organization,” he said. “We said why? Our clients have active and passive, why can’t we offer products agnostically? That’s actually worked.”

For all of these perceived “problems” that passive funds may have, the CEO of the world’s largest asset manager with over $6 trillion under management isn’t concerned.

“I don’t see a point at this time where it’s going to create a real problem,” Fink said. “And as a leading passive manager, we care a lot about this.”

Ethan Wolff-Mann is a writer at Yahoo Finance. Follow him on Twitter @ewolffmann. Confidential tip line: FinanceTips[at]oath[.com].

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