In the family - BlackRock's Family Office audiocast series

00;00;01;25 - 00;00;24;13

Chris Tatlock

Welcome everyone to the third episode of our audiocast series In the Family, where we bring together key voices shaping the landscape for family offices. I'm Chris Tatlock, a director on BlackRock's U.S. family office team within the Americas institutional business, and our host for today's episode. Joining me today is Catherine Kress, Head of Geopolitical Research and Strategy at BlackRock.

00;00;24;15 - 00;00;26;02

Chris Tatlock

Welcome, Catherine.

00;00;26;04 - 00;00;28;14

Catherine Kress

Thank you so much. I'm excited to speak with you.

00;00;28;16 - 00;00;34;21

Chris Tatlock

And we're excited to have you, Catherine.

00;00;34;23 - 00;00;56;15

Chris Tatlock

Today we're diving into an area that is top of mind for family offices, geopolitics, the U.S. election, and the impact of different election scenarios on compelling investment strategies. Perhaps we can start by setting the scene. The geopolitical situation globally remains extremely dynamic and delicate. How do you characterize and assess the overall landscape?

00;00;56;17 - 00;01;18;07

Catherine Kress

Thank you Chris. So let me just offer a few observations on the overall geopolitical landscape. First, I think it's fair to say that the geopolitical environment is unsettled. It's changed dramatically over the last few years. We've seen this series of cascading events, starting with the U.S. trade wars, extending to the Covid pandemic, Russia's invasion of Ukraine, the outbreak of war in the Middle East.

00;01;18;09 - 00;01;41;05

Catherine Kress

These events have all built on each other and now hang over the global economy and markets. Our view in the BlackRock Investment Institute is that geopolitics has become a persistent and structural market risk. Now, throughout history, the impact of geopolitics on markets has often been indirect, modest, short-lived. We did an analysis several years ago looking at risk events through history, and that's what we found.

00;01;41;08 - 00;02;03;14

Catherine Kress

But today's events are different in our view. They're driving long-term, structural change in the geopolitical order. So as we think about the characteristics of that order, we tend to put them in three buckets. The first is geopolitical and economic fragmentation, the second is volatility, and then the third is the rewiring of global supply chains. So I'll tick quickly through each.

00;02;03;16 - 00;02;23;12

Catherine Kress

So first on fragmentation, we're seeing the emergence and hardening of geopolitical and economic blocs in the world. So the U.S. and its allies in Europe and Asia are more unified than they've ever been. And countries like China, Russia, Iran, North Korea are cooperating more closely than they have in decades, with the shared goal of reducing U.S. power and influence.

00;02;23;14 - 00;02;43;14

Catherine Kress

But between these two geopolitical blocs, a really interesting group of countries has emerged. And we consider these the multi-aligned. These are the countries that have not taken sides in the contest between the U.S. and China. They haven't necessarily adopted the western position against Russia. The multi-aligned nations are very different from the non-aligned movement of the Cold War in that they're more than just statements and posturing.

00;02;43;16 - 00;03;07;14

Catherine Kress

They are major economies like India, Saudi Arabia, Turkey, Brazil. The economist calls them the Transactional-25, reflecting their more fluid, pragmatic approach to the world, which I think reflects their uncertainty around the future distribution of power. But as key sources of liquidity in the world, holders of supply chain inputs, natural resources, we see them as very well positioned to drive future global growth.

00;03;07;17 - 00;03;25;19

Catherine Kress

Now, the second characteristic of the landscape is volatility. There's been a range of measures coming out in the last year or so, showing that we're seeing the largest number of violent conflicts worldwide since World War II. And indeed, we have two hot wars underway in the Middle East and Ukraine. Flashpoints in the South China Sea and Taiwan are growing increasingly dangerous.

00;03;25;20 - 00;03;43;06

Catherine Kress

Now, if we think about the US election, these are conflicts that the next U.S. president will have to deal with. This heightened volatility is actually giving way to an increase in global defense spending. We saw global defense spending cross the $2 trillion threshold for the first time ever last year. So that's a trend we see is set to continue.

00;03;43;08 - 00;04;12;29

Catherine Kress

And then last on rewiring we're seeing an acceleration in the rewiring of globalization. This is a dynamic we've been hypothesizing for some time, specifically that concerns around national security, resilience would increasingly drive economic and business decision making, and that economic relationships would rewire along geopolitical lines. The data here increasingly supports our hypothesis and what it shows is that overall trade is not declining, but trade between geopolitical blocs is slowing and supply chains are getting longer.

00;04;13;01 - 00;04;36;12

Catherine Kress

One specific trend, I think is interesting is that we've seen direct trade and investment between the U.S. and China decline. And while it's declined directly, we're seeing it increasingly intermediated by third-party countries, which we call the connectors. These are places like Vietnam, Mexico, Indonesia. Each has become a top recipient of Chinese exports and FDI, and has increased their imports to the U.S. in parallel.

00;04;36;15 - 00;04;48;26

Catherine Kress

So these connector countries have brought resilience to global trade and activity. They've provided ballast against some of the instability we've seen. I'll leave you just with three questions that I'm thinking about as we consider the shape of globalization going forward.

00;04;48;29 - 00;05;01;27

Catherine Kress

One is what are the macro impacts of these supply chain shifts? Supply chains are getting longer and more complicated. Our view is that that's an inflationary dynamic and could be a drag on growth absent some dramatic productivity gains from AI.

00;05;02;00 - 00;05;24;25

Catherine Kress

Second, amid escalating geopolitical competition, how much longer can the connectors actually hold global trade together? How long will the U.S., for example, allow the connector countries to be connector countries? So we've seen a range of policy proposals in the U.S. and Washington and on the campaign trail looking to block Chinese manufacturers, for example, from evading tariffs by setting up manufacturing in third-party countries.

00;05;24;28 - 00;05;50;14

Catherine Kress

And then third, and finally, how has the lengthening of supply chains actually increased risks? If we look at the example of the explosion of pagers and walkie talkies by Hezbollah militants in Lebanon several weeks ago, we see how longer supply chains could give way to questions around penetration and weaponization. We think examples like that could accelerate the reshoring drive going forward, looking to reduce the distance between factories and markets.

00;05;50;16 - 00;05;57;14

Catherine Kress

So fragmentation, volatility and rewiring, those are some of the buckets that we think about as we characterize the landscape generally.

00;05;57;17 - 00;06;43;23

Chris Tatlock

Thanks Catherine That's a great overview. Family offices, which often have diversified portfolios across various asset classes, liquid and private markets, regions, sectors, all need to stay informed about these potential shifts to make strategic and tactical decisions to both preserve and grow their portfolios. Against this backdrop, we have the U.S. elections right around the corner. The U.S. election, in particular, is significant because the U.S. is a major global economic player and changes in U.S. policies can have far-reaching effects on global markets, trade agreements and international relations, making it crucial for family offices to closely monitor and prepare for these outcomes. What can you tell us about the state of the U.S. race and what we should be watching for at this moment?

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Catherine Kress

So this is perhaps the number one question I'm getting from clients right now, but I'll just try to boil it down to a few observations. One is, despite the U.S. typically running the longest election cycle globally, we're now seeing the shortest race for president in history. President Biden withdrew from the race on July 21st, endorsed with Vice President Kamala Harris 20 minutes later, and by July 23rd, she had secured a majority of Democratic delegates, effectively clinching the nomination. Voting is now actually underway, with states sending out mail-in ballots and early voting starting in a number of places.

00;07;16;18 - 00;07;30;22

Catherine Kress

Two Biden's withdrawal effectively reset the race, and we see this in the polling. So Biden was trailing Trump by about three points before he left the race. Polling averages today show Harris with a lead of roughly one point. So we've seen a four point shift or so.

00;07;30;24 - 00;07;55;07

Catherine Kress

Three, this leaves us with a race that's exceedingly close. So most credible polls show a toss up. As I said, Harris has a very small advantage in the national polls within the margin of error. But in the battleground states, the seven states where the race will be decided, it's a dead heat. This is the first time in 60 years that a candidate hasn't held a five or more point margin for more than three weeks, so it's nearly impossible to predict the outcome.

00;07;55;10 - 00;08;19;02

Catherine Kress

Four, in Congress, we could very well see divided government. Republicans have a structural advantage in the Senate. In the House, Democrats have a slight advantage, but control will likely be contingent on who wins the presidency. And in all events, margins are likely to be tight. I think regardless of who wins, divided government, combined with a less friendly environment for regulation in Washington, would be a key constraint on either president's policy agenda.

00;08;19;05 - 00;08;34;19

Catherine Kress

Fifth, it is very unlikely we will know the outcome of the election on Election Day. If you look at state-by-state election mechanics, this could take days. A range of analysts are pointing to the fact that this might be the most litigated election in history. So we're preparing for a significant period of uncertainty.

00;08;34;21 - 00;09;23;02

Catherine Kress

And then last, when you think about the policy implications, the contrast between the two candidates couldn't be more stark. Across a range of issues, from taxes and trade, to immigration, foreign policy, climate, energy regulation, governance, there are substantial policy and political differences between a potential Trump administration and a potential Harris administration. One takeaway, from our analysis in the BlackRock Investment Institute, is that neither candidate is charting a course to reducing the fiscal deficit. So from an investment perspective, we see the range of factors at play reinforcing our view of persistent budget deficits, sticky inflation, higher-for-longer interest rates. The sectors likely to be impacted range from healthcare and technology to financials and energy. So it's going to be a consequential election, no doubt. But right now, too close to call.

00;09;23;05 - 00;09;50;17

Chris Tatlock

Lots at stake here. That's very interesting, Catherine. Family office investors are likely to be significantly impacted by these implications, as they can directly affect their investment strategies. We work with family offices to stress-test their portfolios and understand how different scenarios might affect their assets. And we can help guide them make adjustments, as needed, to preserve capital, minimize volatility, maximize returns, and meet overall risk and return objectives.

00;09;50;19 - 00;10;01;05

Chris Tatlock

We have a client Insight unit that offers dedicated portfolio analysis, including stress-testing and scenario analysis, to help family offices account for these tail risks across different market environments.

00;10;01;11 - 00;10;05;12

Catherine Kress

Yeah, the Client Insight Unit is a great resource. So highly recommend that.

00;10;05;14 - 00;10;17;18

Chris Tatlock

So you mentioned there are substantial policy differences between the two candidates. Could we double-click on that? What are some of the key policy areas you and your team are focused on, and how do you see the likely market impact?

00;10;17;21 - 00;10;29;26

Catherine Kress

Sure. So at BlackRock, we're focused on three broad buckets of policy implications when we think about investment implications, generally. The first is fiscal policy, the second is regulatory policy, and the third is trade policy.

00;10;29;29 - 00;11;04;25

Catherine Kress

So in the fiscal policy space, we think a Trump administration would prioritize extending the provisions of the 2017 Tax Cuts and Jobs Act and potentially implement individual and corporate tax cut as well. A Harris administration, by contrast, would seek a partial extension of the Tax Cuts and Jobs Act, but this would likely be narrower and offset by tax increases on corporations and high-income earners. One takeaway from our analysis, as I noted earlier, is that neither party is really focused on tackling the budget deficit. So we see these persistent deficits as reinforcing our views around inflation and interest rates going forward.

00;11;04;27 - 00;11;28;29

Catherine Kress

On the regulatory side, energy and technology will be in focus. So energy would be a key policy priority of either administration. One important note is that U.S. oil and gas production is already at record levels. So a Harris administration would likely see a continuation of the Biden administration's approach to energy policy, including support for clean energy. We would see a continued focus on implementing the Inflation Reduction Act.

00;11;29;02 - 00;11;57;24

Catherine Kress

A Trump administration would also support increased U.S. energy production, but look to scale back implementation of the Inflation Reduction Act. For a number of reasons, we think the act is unlikely to be repealed entirely, though. Regardless of the outcome, there is bipartisan agreement on the need for permitting reform to build energy infrastructure. But now, from an overall regulatory perspective, a Trump win could mean some deregulation, including the rolling back of regulation for banking in particular.

00;11;57;27 - 00;12;11;24

Catherine Kress

By contrast, a Harris win, we would see efforts to reshape the healthcare landscape through expanded Medicare drug price caps, Big Tech may still be a target for bipartisan antitrust measures. So that's going to stay in focus regardless of who wins.

00;12;11;27 - 00;12;49;28

Catherine Kress

Last, when it comes to trade policy, both candidates are likely to pursue additional export controls on national security grounds, especially in advanced technology. On tariffs, Harris is likely to maintain the status quo, with some potential targeted increases in tariffs against China. Trump's proposed 60% tariffs on China and 10 to 20% universal tariffs would be a significant escalation, though. I think in general, this posture of increased protectionism under either administration reinforces our views, at BlackRock, around economic and geopolitical fragmentation, which is one of the structural factors we see keeping inflation higher medium-term.

00;12;50;01 - 00;13;07;16

Chris Tatlock

Thank you. That's very insightful. One question is there a difference, in your opinion, between divided governments and Blue-or-Red sweeps from a policy point of view? Put differently, does a divided government limit policy change, or alternatively, which policy areas could a divided government focus on?

00;13;07;18 - 00;13;26;24

Catherine Kress

Sure. So right now, if you were to look at the polls, the two kind of most likely scenarios that we're looking at are a potential Red-sweep scenario or a divided government scenario under Harris. Prospects for divided government, as I said, is key to our analysis. So if we think about those two scenarios, the potential Red-sweep scenario would give way to more dramatic policy change.

00;13;26;27 - 00;13;53;14

Catherine Kress

Divided government under scenario would see more limited policy change given some of the constraints that divided government presents. And as I said, in a divided government scenario, presidents typically look to things like executive orders and regulation to implement their policy agenda. But right now, the environment in Washington is less friendly to regulation following a series of recent Supreme Court decisions. So there's a number of constraints on the President's ability to enact their agenda, regardless.

00;13;53;17 - 00;14;10;27

Catherine Kress

Fiscal policy is one of the areas where considerations around divided government is really key for investors. Control of Congress will ultimately dictate the size and scope of extensions to the Tax Cuts and Jobs Act, for example. And it will impact more generally the scale and shape of government spending going forward.

00;14;10;29 - 00;14;24;07

Chris Tatlock

What can we learn from history of the financial markets? Do political events matter taking a medium-term horizon, or do they just impact investor sentiment in the near-term and then the fundamental outlook reasserts itself?

00;14;24;09 - 00;14;56;16

Catherine Kress

So as I noted at the top, I think generally speaking, the impact of geopolitics tends to be indirect, modest, short-lived. When it comes to elections, specifically, we find that the uncertainty around the elections can, at times, be a drag on markets in the lead up to elections, but there's also some seasonality effects at play. Regardless of who wins, markets tend to go up after elections. I think that's in part because of the clarity that they provide. So when we talk to investors, we actually advise them to kind of see through market related volatility and stay invested for the long-term.

00;14;56;19 - 00;15;06;15

Chris Tatlock

Thank you so much, Catherine. This has been a great discussion. As we wrap up, do you have any final advice for family offices managing through these complex issues and an election year?

00;15;06;17 - 00;15;38;10

Catherine Kress

Sure. So my final advice for family offices would just be to stay proactive and adaptable. The political and economic landscape, as we've seen over past years, can change rapidly, but especially during an election year. It's important to stay informed, work closely with advisors, be prepared to adjust strategies as needed. So leveraging resources like BlackRock's insights and the Client Insight Unit can provide valuable guidance and support. By staying vigilant and flexible, family offices can navigate the complexities of this election year and position themselves for long-term success.

00;15;38;12 - 00;15;47;14

Chris Tatlock

Absolutely. Thank you, Catherine, and for sharing your insights on navigating the election landscape. It's been a very informative discussion and one that I know our listeners will enjoy.

00;15;47;17 - 00;15;50;03

Catherine Kress

Great. Thanks, Chris. Thanks for having me, this has been fun.

00;15;50;06 - 00;15;57;18

Chris Tatlock

And to our audience, thank you for listening. Stay tuned for more insightful discussions on our next episode of In the Family.

00;15;57;20 - 00;16;29;19

Chris Tatlock

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Investing involves risk, including possible loss of principal. In the U.S., this materials intended for institutional use only, not for public distribution. For full disclosures, go to blackrock.com forward slash institutions, forward slash en dash US forward slash our dash clients, forward slash family dash offices.

[00:00:00] Seema Ackerman: Welcome everyone to the second episode of our audiocast series, “In the family,” where we bring together key voices shaping the landscape for family offices. I'm Seema Ackerman, Managing Director on BlackRock's U.S. Family Office team within the Americas Institutional Business. Joining me today is my friend, Maisie Hughes, Head of the Family Offices business for SpiderRock Advisors¹. Welcome, Maisie.

[00:00:24] Maisie Hughes: Thanks, Seema. I'm excited to be here.

[00:00:27] Seema Ackerman: We are excited to have you on this very special topic. So today, we're diving into the topic that is crucial for many of our listeners: concentrated stock selection. Maisie, can you start by explaining why concentrated stock positions are so significant for family offices?

[00:00:50] Maisie Hughes: Absolutely, Seema. Concentrated stock positions are often significant because family offices may have substantial wealth tied up in single stocks. And this could be for a variety of reasons, the entrepreneurial background of the family, where the wealth originated from founding a company holding a significant stake in a public corporation. So family offices may benefit by taking a strategic approach to managing these concentrated positions by seeking to balance growth potential with risk mitigation.

[00:01:23] Seema Ackerman: It’s interesting because concentrated positions can offer a tremendous amount of upside, but they also come with unique risks. Can you talk about some strategies that family offices can use to manage these risks?

[00:01:42] Maisie Hughes: Absolutely. Options are one of the ways to change portfolio risk – whether you’re reducing or swapping – without triggering a tax bill day one. The most common strategies employed by the families we work with are low basis, concentrated positions are risk reduction – whether through a covered call or costless collar – or swapping from idiosyncratic to systematic risk through our exchange fund replication strategy. All of these approaches can be combined with strategic liquidation, which allows families to use the option PnL² from their overlay to systematically work out of appreciated, low basis holdings. Or, I guess to say it more simply, the overlays can create gains and losses which families can deploy to seek to work out of their positions through time tax neutrally.

[00:02:24] Seema Ackerman: Got it. The simple version was a little easier to understand. Diversification and tax planning are indeed vital components, and Aperio is a tool that we offer to help clients tackle potential tax difficulties. How do family offices balance the need to diversify with the desire to retain control or influence over their core holdings?

[00:02:46] Maisie Hughes: It’s a great question because it’s definitely a delicate balance. Some families might use derivative strategies like collars, or covered calls or exchange fund replication to mitigate downside risk, or in the case of exchange funds, to re-risk into the index of their choosing, all without having to sell the stock. Another approach would be to simply set up a family trust that holds the shares, thereby allowing the family to retain voting control while slowly diversifying the economic risk.

[00:03:13] Seema Ackerman: Got it and let’s talk about the emotional aspect now. For many families, there’s an understandably strong attachment to their core holdings. How do you address the emotional component?

[00:03:34] Maisie Hughes: Yeah, this is always a tricky one and emotions are definitely a big part of the conversation. It's crucial for all of these things to have open dialogues about the family’s goals and values from the start and from there, we can seek to understand where the clients are on the spectrum of their emotions and deliver combinations of strategies to meet them there. Importantly, all of our solutions allow the family to retain their share count but also to seek to change the economic risk. And this is what really can differentiate derivative solutions and it’s also what has helped us to thread the needle between emotional ownership and a fiduciary portfolio.

[00:04:03] Seema Ackerman: That’s really insightful. Now, looking at the current market environment, what trends should family offices consider when managing concentrated stock positions?

[00:04:05] Maisie Hughes: Yeah so given the market volatility and economic uncertainties, it’s important to stay agile. Monitoring market conditions and having predefined action plans for different scenarios can be very beneficial. Also, considering energy transition factors and how they might impact the long-term value of core holdings seems to be increasingly important.

[00:04:31] Seema Ackerman: Very important indeed. Let’s shift gears a little bit. How do you see technology advancements, particular in financial technology, impacting the management of concentrated stock positions?

[00:04:41] Maisie Hughes: Yeah so the tech stack that we leverage for all of our strategies helps us to address these two age-old challenges of incorporating listed options into portfolios – specifically options are difficult to trade and impossible to scale. So technological advancements really power our entire business and they’ve also significantly improved our ability to manage concentrated stock positions. And then there are tools for portfolio analytics, risk management, and tax optimization that have become much more sophisticated. These technologies help enable families to make data-driven decisions and to implement complex strategies with greater precision. For example, advanced modeling software can help to predict the impact of various market scenarios on concentrated positions, and then allow for proactive adjustments.

[00:05:33] Seema Ackerman: It’s so interesting what a critical role technology has played over the years and how much more important it becomes going forward. At BlackRock, we were founded on the principal importance of risk mitigation and technology, and we seek to really deeply understand how crucial it is to have these reliable tools for portfolio analysis. So as we look ahead, what other trends do you foresee affecting the approach family offices may take towards their concentrated stock positions?

[00:06:01] Maisie Hughes: It’s a great question. You know, there’s so much to choose from. I’d say one emerging trend that we’ve seen is the increasing focus on impact investing. Many family offices are looking to align their investment strategies with their philanthropic goals as opposed to having two separate and distinct efforts. This involves not just financial returns but also social and environmental impact. There's also a growing interest in thematic investing, where family offices invest in specific themes like clean energy or healthcare innovation, which can help offer diversification but that also align with their values. And of course, I wouldn’t be doing my job if I didn’t mention that for all families, maintaining a laser focus on after-tax returns as well as the tax implications of any portfolio change they might make.

[00:06:55] Seema Ackerman: It’s so true impact and thematic investing are gaining traction. You know it’s in my conversations nowadays on a daily basis. How do you advise family offices to incorporate these trends specifically while managing their concentrated positions?

[00:07:10] Maisie Hughes: Yeah so we can help more on the backend of this challenge so say if a family owns shares in a business whose practices and purpose no longer align with their core values, we can work with them to divest the position while using tax PnL to pay any associated capital gains bill. And so once they are out of the stock, they can work with Aperio to redeploy the equity beta exposure in a strategy that’s more aligned with the family’s financial and impact goals.

[00:07:43] Seema Ackerman: That’s so interesting and certainly the tools that a lot of family offices I’m sure would be interested in hearing about and very few have in-house frankly. So as we wrap up, do you have any other final advice for family offices managing through these concentrated stock positions?

[00:08:00] Maisie Hughes: Yeah I guess I’d just finish by saying that it’s crucial to have a well-thought-out strategy that includes risk management, tax planning, as well as the emotional considerations. And always working with experienced advisors who understand the unique challenges of family offices can make a significant difference. And, again just to stay informed about market trends and regulatory changes that might impact their core holdings. And remember, the goal is to balance preserving the family legacy with achieving long-term financial success.

[00:08:30] Seema Ackerman: Indeed. Thank you, Maisie, for sharing your views on managing concentrated stock positions. It’s been a very informative discussion and one that I know lots of our clients are interested in hearing about.

[00:08:38] Maisie Hughes: Well, it’s been my pleasure, Seema. Thank you so much for having me.

[00:08:42] Seema Ackerman: And to our listeners, thank you for tuning in. Stay tuned for more insightful discussions on our next episode of “In the family.”

[End of episode]

¹ SpiderRock Advisors, LLC (“SRA”), an investment adviser registered with the SEC and a commodity trading advisor registered with the CFTC, provides discretionary options overlay investment strategies. SRA is an indirect wholly owned subsidiary of BlackRock, Inc.

² Profit and loss.

Disclosures (read aloud): This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Investing involves risk, including possible loss of principal.

In the U.S., this material is intended for institutional use only – not for public distribution. For full disclosures go to blackrock.com/institutions/en-us/our-clients/family-offices

Disclosures to be added to end of transcript

SpiderRock Advisors, LLC (“SRA”), an investment adviser registered with the SEC and a commodity trading advisor registered with the CFTC, provides discretionary options overlay investment strategies. SRA is an indirect wholly owned subsidiary of BlackRock, Inc. The Aperio and SpiderRock strategies discussed herein are made available by Aperio Group, LLC, and SpiderRock, LLC, each an SEC registered investment advisor, which are indirect, wholly-owned subsidiaries of BlackRock, Inc.”

This material is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any BlackRock Funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Options involve risk and are not suitable for all investors. There is no guarantee that any investment strategy illustrated will be successful or achieve any particular level of results. This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation or offer or solicitation to buy or sell any securities or to adopt any investment strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated; i.e., the examples and calculations are intended to be representative of some but not all taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax, and asset allocation, there may be situations in which the recommendations would not apply. Please discuss any individual situation with tax and investment advisors first before proceeding. Taxpayers paying lower tax rates than those assumed or without taxable income would earn smaller tax benefits from tax-advantaged indexing or even none at all compared to those described.

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[00:00:00.05] SEEMA ACKERMAN: Welcome, everyone, to our new audiocast series called In the Family, where we bring together key voices shaping the landscape for family offices. I'm Seema Ackerman, managing director on the US family office team within the Americas Institutional Business at BlackRock.

[00:00:15.08] Joining me today is Alan McKenzie, BlackRock's CIO of our multi-asset investment solutions business, specifically focused on family offices and high net worth individuals. Welcome, Alan.

[00:00:27.47] ALAN MCKENZIE: Thank you, Seema. It's a pleasure to be here.

[00:00:29.54] SEEMA ACKERMAN: Absolutely. Let's jump right in. The BlackRock Investment Institute, also known as BII, recently released its 2024 Investment Outlook. This outlook highlights three critical themes, the first of which emphasizes the management of macro risk. Alan, could you shed some light on what matters in this new regime?

[00:00:49.19] ALAN MCKENZIE: Certainly. I would say in the current landscape, we're really seeing a much more challenging environment. Structurally higher interest rates. Generally speaking, tougher financial conditions. And I think markets are still adjusting to this environment.

[00:01:02.67] And within that as a backdrop, I think it's incredibly important to think about risk at a macro level, and then how does an investor respond to that risk, really understanding all of the nuances, all of the inherent risks that are in their portfolio, and being very nimble in response.

[00:01:20.91] SEEMA ACKERMAN: The context is key, indeed. The second point in the outlook emphasizes steering portfolio outcomes. BII suggests taking a more dynamic approach while staying selective with allocations. What's your perspective on this? How does this apply to family offices?

[00:01:35.37] ALAN MCKENZIE: Again, I think given the backdrop of more uncertainty and tougher conditions, I think it's really all about taking the reins and being proactive in shaping portfolio outcomes. Families should really consider a dynamic approach, adjusting their portfolios to the evolving market conditions.

[00:01:51.66] We believe that staying selective in allocations is really key in this type of environment, especially considering the potential impact of various macroeconomic factors on different asset classes.

[00:02:02.61] SEEMA ACKERMAN: So a dynamic and selective approach makes a lot of sense. But let's talk about harnessing mega forces. What are they? How do they play a role in steering family office portfolios?

[00:02:12.81] ALAN MCKENZIE: I think mega forces are transformative trends that transcend traditional asset classes. The BII outlook suggests investors should consider these five mega forces-- digital disruption and AI, the future of finance, a fragmenting world, low carbon transition, and demographic divergence-- as building blocks for portfolios, recognizing their potential to shape the investment landscape over the long term.

[00:02:38.13] SEEMA ACKERMAN: So are there any asset classes that stand out for 2024 that are opportune for families?

[00:02:43.62] ALAN MCKENZIE: I think private markets continue to stand out to me as a prime opportunity for family offices. Market volatility has impacted family offices to varying degrees. In 2024, family offices should look for areas of attractive return of capital, while being selective on illiquid capital.

[00:03:00.87] SEEMA ACKERMAN: I completely agree, Alan. As shown from our 2023 global family office survey, family offices continue to show a strong preference for private markets. Specifically, there's an interest around infrastructure and private credit.

[00:03:14.46] ALAN MCKENZIE: Yeah. I think taking more of a whole portfolio perspective. We see that the opportunity set for family offices to really work and establish really deep relationships with existing managers should, I think, improve the outcome for this particular asset class.

[00:03:32.22] So at BlackRock, we certainly leverage our size and scale, and we think that enables us to align that much closer with family offices to truly help them take every step.

[00:03:43.08] SEEMA ACKERMAN: And to build further on that, we've seen clients communicate a desire for solutions over product. Take Appirio, for example. Taxes continue to be a prime focus for our clients, with a desire to optimize after tax returns.

[00:03:56.82] The ability to create customized tax loss harvesting strategies is becoming more of a priority for most family offices, and so a solution like that has really helped a lot of clients address challenges inside of the family office, no matter how big or small.

[00:04:12.66] ALAN MCKENZIE: Yeah, absolutely. Definitely. When I think about how we partner with families, really what we're trying to do is leverage our ability to really utilize our depth of knowledge and expertise to build a really holistic solution for our clients.

[00:04:27.84] And I think with the backdrop of more volatility, the rise of these mega forces we've talked about, I think we're better positioned than ever before to capitalize on these forces to provide solutions for our clients.

[00:04:38.88] SEEMA ACKERMAN: Totally. But let's take a step back and discuss some of the mega forces we mentioned earlier. At the top of the list is digital disruption and AI. How can families navigate and harness the opportunities within that area?

[00:04:51.81] ALAN MCKENZIE: I think digital disruption and AI are reshaping industries across the board. Family offices should consider how these technologies impact their investments as companies embracing innovation stand to gain a competitive edge.

[00:05:04.42] Whether it's an AI-driven solution or a business capitalizing on digital transformation, I think integrating these opportunities into portfolios can offer long-term growth potential.

[00:05:15.31] SEEMA ACKERMAN: That's helpful to hear. And moving on to the future of finance, how do you see family offices adapting in that evolving landscape?

[00:05:22.24] ALAN MCKENZIE: I think the future of finance encompasses technological advancements, changing consumer behaviors, and evolving regulatory landscapes. The progression of financial systems is ongoing. I think given this backdrop, areas like private credit and even fixed income broadly come to mind as ideal asset classes for family offices to consider.

[00:05:42.97] Specifically, within private credit, as traditional lenders continue to pull back from commercial markets, private credit has filled the gap, with more companies gravitating to private credit and widening the investment opportunity set.

[00:05:55.60] Specifically within fixed income, rising rates, in addition to the current macro landscape, can help families create a high quality and sizable volatility buffer within their portfolio that still provides a substantial return.

[00:06:08.83] Family offices should evaluate the implications of this transformation and position themselves accordingly to capitalize on emerging opportunities in the financial sector. Embracing these changes, can enhance portfolio resilience and foster long-term success.

[00:06:23.74] SEEMA ACKERMAN: Absolutely a crucial point. Thank you so much, Alan, for providing valuable insights into the key mega forces shaping the 2024 outlook for family offices. But as we wrap, any closing thoughts?

[00:06:34.72] ALAN MCKENZIE: I think family offices should approach 2024 with a strategic mindset, but embrace the dynamic nature of the markets. Stay selective in portfolio allocations, and leverage the identified mega forces as building blocks.

[00:06:48.64] By understanding and adapting to these trends, family offices can position themselves for resilience and success in the evolving investment landscape.

[00:06:56.98] SEEMA ACKERMAN: Wise words. Thank you, Alan, for joining us today to discuss the 2024 outlook in the context for family offices.

[00:07:04.00] ALAN MCKENZIE: My pleasure, Seema. It's always exciting to discuss the future of family office investments.

[00:07:07.87] SEEMA ACKERMAN: And to our listeners, thank you for tuning in. Stay tuned for more discussions shaping the world for family offices.

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