Larry Fink Wants To Tokenize Stocks And Bonds

Following is the unofficial transcript from a cnbc interview with BlackRock Chairman & CEO Larry Fink on CNBC's“Squawk on the Street” (M-F 9AM – 11AM ET) today, Friday, January 13, 2023.

DAVID FABER: Joining us now in a first on CNBC interview is BlackRock's Chairman and CEO, Larry Fink. Larry, it's good to have you particularly here on“Squawk on the Street.” Thank you for joining us this morning.

Environmental, social and governance (ESG) issues have drifted to the forefront of investing over the last several years, but more recently, the ESG issue has become contentious. ESG proponents claim they're pushing companies to be more friendly to the environment and more equitable in their governance and social issues. However, others argue that ESG isn't read more

LARRY FINK: Happy New Year, David and Jim.

JIM CRAMER: Thank you.

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FABER: And to you. You know, speaking of the new year, I was looking at your your sort of memo to colleagues where you talk about the current operating environment being unlike anything we've seen in decades. You talk about 2022 being a year of huge transition. How do you see this year shaping up Larry more of the same or, you know, are your expectations perhaps a bit different than what we've seen last year?

FINK: Well from the perspective of long-term investors , I see 2023 to be enormously opportunistic. Actually, maybe the hardest years for investing for the long term were the last few years because of negative interest rates. Investors worldwide had to take on more and more risk to achieve their liabilities.

Actually now having you know two year treasuries gonna be close, you know, at four and a quarter, credits at five, high yield that 8%, we're gonna see a whole restructuring and a rebalancing of how portfolios were constructed just a few years ago and you're gonna see now once again more bond investing within the, within the confines of pension fund investing.

In the, 20 years ago, most pension funds had 60, 70% in bonds because they were able to achieve their, their role and their goals that they were trying to achieve. By 2018, they could not own bonds, they had to put on more and more illiquidity. And so in reality, we're going to be seeing more and more opportunities of rebalancing back into bonds.

And as you talk about a lot about growth equity, when interest rates are near zero, you can, you have the ability to buy high growth stocks because you're not losing any money. When if short rates go up to 5%, you're paying a big premium for that type of perceived growth.

And that's a recalibration what that we saw in 2022 and now we're living in an area where you're going to be able to invest differently. In addition, we are seeing more and more investors looking at infrastructure where you're going to have a combination of some illiquidity but you're gonna have high coupon.

I think this is going to be a period of time with more dividend stocks again as a play so I look at this as more opportunistic and probably the most important thing of our announcement today in terms of earnings has been BlackRock is winning more share wallet than any firm in the world in good markets when markets are going down or in bad markets or good markets when markets are going up and bad markets are going down.

And this past year, we had $400 billion of net inflows and long-term assets of which 230 billion came from the United States. And so, we have now raised, raised about a $1.7 trillion over the last few years from from investors rewarding us in good times and bad times because of the guidance we're giving and also our performance and our fiduciary standard.

FABER: Understood and, you know, last year though was distinguished by the fact that whether you own bonds or stocks, you had a bad year, you know.

FINK: Absolutely.

FABER: You seem to be saying, I don't want to read into it too much, but tell me, you know, are you expecting bonds to sort of become a better performer during the course of this year which would seem in some ways to say, well, maybe there won't be as much buying behind equities for the year?

FINK: Well, I mean, we still see one or two more tightenings. We see a, obviously a very inverted yield curve so the market is saying I'll buy I'll buy coupon here, I'll buy it. But what I'm, what I'm saying is we are going to see more and more of long-term pension funds reallocating back to bonds, more into bonds as we receive new pension contributions.

We're gonna see more of that, that doesn't take away from the equity market, but I do believe you're gonna see as were witnessed in '22, we saw a whole recalibration of price earnings ratios, especially growth.

FABER: But Larry, to your point, I mean, the bond market is now actually competitive with the equity market. As you said, in '18 it was like, I can't get a return anywhere. This is a very different world now in 2023.

FINK: It is a totally different world and it's actually an easier world to take, you're gonna take less risk to get to your target now more than ever before. So I would frame it, you know, obviously, we have the nightmare of '22 with both bond and equity markets down but if you start today and look at the opportunity today, you actually have more opportunity going forward to invest with less risk and reaching your target returns that you're looking for for the long term.

CRAMER: Larry first, I want to thank you for coming on our show because I think you are a beacon in this industry. A couple of things that I think that certainly I want to follow up on. You talk about share take and I know that you bought 500 million dollars worth of shares yourself for the company during the fourth quarter and that's up from 375 in the third.

I just want to talk about how you distinguish yourself. One is just on extraordinary technology, the technology that is so much better that everybody else said they have to use it. And second if you don't mind addressing BlackRock investment stewardship because I think that your edge may be also that you democratize people, those of us who want to be able to vote in certain ways, you are technologically able to give it to us. How much are those advantages when you talk about share?

FINK: Well, let me just start off and say our technology platform continues to differentiate us. We had record new client demand for our Aladdin system. The expansion of Aladdin's capabilities has grown dramatically. You know, we actually added a new geographic region. We have our first client in Africa. We have more and more clients in South America.

We're expanding across the board. Using our technology too, we were working on it for a number of years to democratize the vote. There are people who believe that we have, that BlackRock should not have the entirety of the vote and and so we have been working with our clients to say we can provide you with a vote back.

And so we develop technology for our defined benefit plans and some of our, that we are giving them the guidance of what what we see but they are going to do the actual vote, they determine it themselves.

And that gives us an advantage and if the society really wants more and more people to have their vote back, we want to provide the best experience in doing that and we are doing that and it's just another example of us staying in front of our clients' needs, trying to be that fiduciary on behalf of our clients and trying to give them the guidance that leads them to be the best they can for all their beneficiaries.

CRAMER: Well, I think that it's important for people to understand at one point there were a couple of different states that said they didn't like your analysis, felt you were driving you South Carolina, David remember? Driving you toward doing things that were not complimentary to the state and weren't making money.

Of course I come at it from a completely different way which is that I think people want to, want democracy and have actually not been able to have it. You offer choice and most importantly for instance, let's take on climate control. There was the late Jay Fishman I'm sure you remember him-

FINK: Yes, he was a good man.

CRAMER: Maybe the greatest person in the insurance industry. He came to see me a decade ago and he said, Jim, I want you to stop stop investing in companies that have lots of land exposure to the beach because you got to understand that climate is going to be a risk factor, not unlike balance sheet problems.

You have offered people in these choices, it's not been by dictate. Can you please explain how you took in even more money than everybody else even though some States took the stance against your view?

FINK: Well, as I said earlier, we raised $400 billion of net long-term assets, 300 billion net. In the United States, $230 billion of inflows from US clients. Let me be clear, we need to address the issues that some of these states addressed.

We want to clarify our positions if the facts were incorrect. Our job as you said it Jim is to provide choice for every client. It is not our money. 100% of the money we manage is our clients' money and we invest for them under their mandates, under their wishes. We are not political.

Everything we do is on behalf of our clients and clients' needs and if somebody in a state that is more progressive that wants us to invest in one way we will do that and if you have a more conservative view and you believe that is the right thing to do for your for your beneficiaries, we will be doing that on their behalf.

That and so we we had approximately about a little under $4 billion of outflows from these various states, but in the context of winning $400 billion globally in a year where every one of our public peers had outflows, the differentiation is pretty stark. We're winning more share a wallet because of the guidance we're giving.

And most importantly, Jim, our performance has been pretty good. And in fact, it's been very good and so we're we're we're a fiduciary first and foremost by by by providing every state who wishes to have that vote back, we want to provide it to them.

We want to democratize the vote. This is one of the reasons why I'm focused on the whole idea of blockchain for securities. I look forward to the day when we can tokenize stocks and bonds that every stock and every bond we can identify immediately who is the beneficial owner and this is why we're working on it and every beneficial owner from an individual to an institution have the ability to vote, to democratize every single vote, and that's where we want to take this and we're leading that effort.

FABER: Larry, you know, on this larger point though, in many ways you become a lightning rod for criticism from both the right and the left in a way that a lot of CEOs have not even a financial services company. Some of them may go back to that letter you wrote five years ago that still gets quoted often,“A Sense of Purpose,” you know, January 17, 2018.

And and I wonder, again, when the right says, you know, BlackRock is too woke and then the left or perhaps those who are more focused say you're not really doing enough on ESG, it's greenwashing.

Do you regret having written that letter? I'll read a quote here from the New York Times story recently,“Knowing what Larry knows now I suspect there were elements of his CEO letters that he would have omitted or written differently.” That's a quote from Terrence Keeley, who had been a former Global Head of the official institutions group. Do you regret those letters?

FINK: Well, first of all, Terry's a good man and a good friend. No, I don't regret it at all. I think if you take every sentence I said over the last 10 years in terms of my CEO letters, every CEO, CEO letters about long termism and the absence of long-term thought, and I do believe everything I said is really critical.

I believe more than ever that every CEO has to focus on all their stakeholders and if you do a good job with your your employees and your clients, your key stakeholders, your shareholders are the biggest beneficiary of that and and David, the probably the best example is BlackRock. You know, I write these letters, we focus on our clients every day.

We focus on our employees every day in every community we operate. And we now have been public a little more than 24 years, 23 years to be precise. Our share price is appreciated, 7,700% total return. We are the number one performing financial services company in the S&P during that time. And, and it's because I'm willing to have a voice.

I'm willing to speak out on long term issues. And I strongly believe the best companies whether it's research from open door that focusing on the needs of employees, focusing on your clients every day, allows you to build deep and long-term connection with your shareholders that produces long term powerful returns.

And across the board, if you look at every industry, those CEOs and boards and management teams that are focused on those issues are the firms of the future and they have provided us the shareholders the best durable profitability.

FABER: Yeah, all that doesn't mean necessarily that you won't continue to get your share of criticism. A lot of it does seem to come from the right I mean, I had Curtis Loftus on not that long ago a few months ago the South Carolina Treasurer you know who divest it to some extent again, these are relatively, these are small numbers overall, but, you know, he said to me and I want to get your response to this.

He said, I don't represent the rich global elites that Larry Fink hangs out with. I represent Bob's Plumbing and the insurance agent. How do you respond to something like that?

FINK: We've managed money for over 50 million retirees. We manage more money for more firemen, for more policemen, for nurses and teachers than any organization in the world. We represent their money and we take that responsibility with a deep and serious commitment. Our job is to give them hope.

The problem we have in society today a few people are trying to provide hope. And I think one of the prevailing issues we have in the world today and I said this in my prepared speech earlier today, there's too much there's too much fear going on and our job is to provide hope.

Our job is to provide hope for more retirees that and people who are building up to the retirees that they can build their retirement pool to live retirement in dignity and decency. And no firm is more committed in doing that making sure that we are the firm that provides hope, that's providing an ability that people can believe that they can have that wonderful life in retirement.

And that's why no firm is doing more in retirement than BlackRock is. And so, I would just answer that way because I know what we're doing as a firm in every 50 states in the United States and what we're doing other communities around the world, we're trying to develop more and more hope through performance, through guidance, through a fiduciary standard that clients are able to live their life with more hope and I'm proud and I'm incredibly proud that that's what we're doing every day.

CRAMER: Well, I share your lack of cynicism as you know Larry because I think that hope has been and progress would be the word I would use and constructive development all have happened and they're actually empirical.

What I want to talk about for a moment is something that happened yesterday and I don't I want to use it as an analogue not to be personal, but we spent a tremendous amount of time interviewing Nelson Peltz and Nelson Peltz brought up some very good interesting points in his proxy fight with walt disney co (nyse:dis) .

I go back to looking at your principles in your, right on your website, the BlackRock investments and there are two of them that I want to talk about. You talk about the idea that you think long term but that value for shareholders, but there has to be sound corporate governance and the results they must be accountable.

And I thought that what Nelson Peltz was talking about yesterday was situations where heads they win, tails they win. They buy a company that they paid too much for, they're compensated anyway if it works, they're compensated even more.

There were many things that Nelson brought up that would maybe indicate that perhaps when you do your proxy analysis, you're taking these accounts very seriously. Do you think that there are situations where if people knew they had a chance and they knew about their democracy, they might vote with Nelson against Disney?

FINK: Look, this is why I love capitalism. This is why I'm a capitalist and this is why I love public markets. Public markets show the good of companies and the bad of companies, show the weak in governments in governance and the strength in governance. It reveals very willingly and easily who are going to be the winners and losers.

Whether Nelson and any other activist has the right point or wrong point, I think you're correct Jim democratizing these votes will allow more people to convey their feelings as an owner of the company. And this is what we're trying to do and we're trying to do this and making sure that more and more people have the ability to speak their mind in the companies they own and that is the power of capitalism and this is why I'm so proud of the developments in the financial markets in the United States and the opportunities we have.

And because of all this transparency, Jim, this is why the United States equity markets trade repeatedly three to four multiple points above any other market in the world. It is the power of our capitalism, but more importantly, because we have the broadest, deepest retirement market, we have more long term savers who are putting their money to work and investing in companies like Disney or BlackRock or wherever they may wish to invest in, and that and then we have the ability to, you know, every year on vote on the success or failures of every one company.

CRAMER: Okay Larry, do you think that there's enough awareness, for instance, again, on your website you talk about individuals can pick from a range of voting policies to reflect their preference. I think most people do not know that's available and think that this is not democracy. It's just that you've got to just accept the fact about what a company says. How can awareness be brought to the American public that own stocks?

FINK: Well, hopefully we, more and more companies put that on their own website that you have the ability to vote, please vote. I mean, look at one of the big issues we saw since we moved from a paperless proxy, fewer and fewer individuals vote.

And so a lot of this we're in this transition again as we moved as we've changed proxy voting, you know, we are we actually have seen fewer and fewer individual votes. We got to, we have to re-educate in helping people.

We, in some of our products, we don't have the ability to provide the vote to those individuals though because it like in the form of etfs , we don't actually under, we don't have a role of whose ownership, who's the beneficial owner of that ETF and so much of this is gonna require regulatory changes. In the defined contribution plans, same idea that cannot be done.

There needs to be some regulatory changes to allow everybody that have high contribution plans to have that ability. We do have the technology to do that. Now we need some regulatory relief and this is one thing that we're focusing on.

FABER: Let me, let me just end, I want to end with one last question which is about active management. You generated 135 billion of active net inflows, those of us who have been following active managers for many years, I guess, hope springs eternal. You know, I mean, how do you defend an active manager versus saying, hey, come on, just just invest passively because they never beat the index?

FINK: There's winners and losers in active management. It's hard to pick who's gonna be the winner in the future. The history is not any indication of the future. I'm a big believer in active investing. That being said, most of the money that's going into ETFs which everyone thinks is passive is not passive.

It's active investing using ETFs to actively manage their their portfolio, to actively express how they want to manage their portfolio. In bonds, that is going to become the giant revolution using ETFs to actively manage your bond portfolio because you can own a few ETFs to convey your, your actively expressed desire through convexity, duration and credit.

And so, all of these issues are changing and so there's a lot of confusion when we compare the index products versus active and a lot, much of the active or the index investing is not passive, but active investors utilizing these instruments to express their exposures. 2022 was not a good year for active fundamental equities, but active investing worked in many other asset categories.

It certainly worked into many of the fixed income categories, some of the credit categories and some of the value categories of equities. But this is why it's very important for investors to, you know, take time and understand, you know, how are they going to blend their total portfolio and that's gonna be the more and that's one of the biggest growth opportunities for BlackRock.

Much of our active growth was when we had been asked to manage a whole portfolio and I believe more and more organizations are going to be outsourcing their entire general account and others and giving and awarding for like BlackRock their entire portfolio.

FABER: Well that's a good place for you to end certainly and we'll be following that closely. Larry, appreciate you joining us today. Thank you.

CRAMER: Thank you.

FINK: Bye, guys. Thank you. Happy New Year to everybody. Stay safe.

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