BlackRock, the world’s largest money manager, has reached a record $3.8trn (€2.8trn) in assets, about 60% of which is for institutional clients, including pensions. CEO Larry Fink, commenting on his firm’s 2012 results, said that the institutional business will launch a “strategic client programme” this year.

IPE asked Joshua Levine, the co-head of US and Canada pensions within the institutional global client group, responsible for US East Coast pension funds, what that means and about new trends in the US pension industry.

“We are working on the strategic client programme,” says Levine. “We are doing an intense internal review of our relationship with the top 100 institutional clients globally. Many are multinational entities, with a large presence in different countries. We want to meet their needs in a globally consistent manner, which means that they’ll have the same level of service anywhere in the world.”

One important trend, among both institutional and retail clients, is the shift to passive investing through separate accounts or ETFs, a business where BlackRock is a global leader. This represents a primary growth area for the asset management giant. In the fourth quarter of 2012, iShares ETFs brought $35.7bn of new assets to BlackRock, iShares’ highest quarterly net new business since the merger of BGI and BlackRock in 2009. The iShares division ended the year with $752.7bn of assets under management, or 22% of BlackRock’s total long-term assets.

“Last quarter we launched 10 Core Series ETFs, a new suite of ETFs designed to serve as the bedrock of buy-and-hold investors’ portfolios, and this year we will focus on fixed income ETFs for institutional use. They are products that match their specific needs in terms of benchmarks and durations, among other factors,” says Levine.

Besides innovating with specific products, BlackRock is taking a new holistic approach to the market. “2012 was a bit different from what I had seen in the past, and 2013 looks like it’s going in the same direction,” Levine adds. “In the past, our relationships with pension funds and other institutional clients were more on a product by product basis. For example, we would talk about fixed-income products, equity products, and so on.

“Last year, and now, CIO and board trustees are asking us big picture questions, such as ‘what would you do if you were in our shoes to improve our risk-reward profile?’ They explain what their return goal is and the maximum level of risk they can take, then they ask us to suggest an asset allocation strategy. So the discussion is becoming broader and broader, and we are doing more and more multi-asset proposals.”

Another big trend among pension funds is increasing exposure to hedge funds in a different way, says Levine, who explains: “In the past they were looking for absolute returns, now they are after alpha returns.”

Many US pension funds, especially in the public sector, are underfunded and finding a solution to this problem is a serious challenge for their managers. “Depending on the degree of underfunding – is a fund 80% funded or 60%? – there are different implications,” Levine says. “Our approach is to understand the investment policy of the fund, which may be fairly defined, and to design a custom solution in order to improve its return together with its risk control. The problem with the traditional model – 60% in equities and 40% in bonds – is that the equity component dictates the results, so the fund’s performance depends on the ups and downs of the markets.

“The predominantly new theme is to get higher returns with a better risk control, lowering a portfolio’s equity correlation. Pension funds can reach this goal by adopting risk parity strategies or optimal beta strategies.”

Public pension funds have special issues related to their political nature. Since the Newtown massacre, for example, New York State’s big public pension fund and California’s fund for teachers have frozen or divested their gun holdings, and they are also asking their external managers to offer gun-free products.

BlackRock stresses that it can and does offer index funds with no gun-related assets if requested by institutional clients, and it manages about $226bn of ‘socially responsible’ portfolios, based on client-defined criteria.