BlackRock exec: 2015 shaping up as “dangerous” year for investment risk

Ben Golub, chief risk officer and senior managing director of BlackRock Inc., the world’s largest asset manager, believes 2015 could become a “dangerous” year to take investment risks.

Golub, SB ’79, SM ’82, PhD ’84, pointed to currency volatility, falling oil prices and deflation concerns, and federal regulation of the asset management industry among the worrisome conditions.

“We’re close to dangerous territory in terms of a risk-taking environment,” Golub said.

Golub’s remarks came Feb. 20 at the MIT Sloan Investment Conference, where he addressed market conditions affecting BlackRock, which has $4.93 trillion under management. MIT Sloan Dean David Schmittlein introduced Golub. Finance professor Deborah Lucas moderated.

Golub said many of today’s troubling conditions, such as currency volatility, are carryovers from 2014. Financial markets were upset in January, when the Swiss unpegged their currency from the Euro to stop its decline in value as the European Central Bank continued its quantitative easing program.

Turbulent oil prices are another concern, Golub said. In 2014, plunging prices affected global investments. Falling oil prices hurt countries dependent on oil exports, such as Russia, while those that import oil benefited from cheaper prices. Here, low oil prices tamped down inflation, encouraging the Federal Reserve to delay a planned interest rate hike.

Low inflation has raised the specter of deflation, however. Golub called deflation “a very bad scenario,” for which he did not have a “master plan.”

“You actually start to think about taking cash and putting it in the vault” in Europe, with interest rates so low, Golub said. “You start to think of how to arbitrage against negative rates. I don’t have a particularly good answer for that. We’re not rushing to invest in companies that have secure warehouses to keep their cash.”

Overly broad federal regulation poses another risk, he said. Asset managers should not have to comply with the same reporting requirements as giant banks or giant hedge funds, he said.

Don’t “go by casual appearances and say because it’s $4.5 trillion, that’s a lot of money, and therefore you must be regulated,” Golub said.

Golub was the first speaker during the daylong conference, themed “Investing in a Brave New World.” He said that in uncertain times, BlackRock focuses on clearly communicating with clients to meet expectations. It also seeks to identify risk as much as possible.

BlackRock created a tool to measure risk tolerance, market sentiment, and market concentration, Golub said. It’s a “dangerous market” when this tool shows market sentiment is low and asset diversification is not an investment alternative, he said. Market conditions now suggest we are headed in that direction, he said.

Golub said risk management isn’t about not losing money. It’s about avoiding losing money the wrong way through “bad ideas” or “bad mistakes,” he said.

“We have all our models and techniques, but doing this is hard,” Golub said. “Getting this right is difficult.”