BlackRock's Acquisitions Create Industry Powerhouse, Stock Upside Muted for Now

By
A A A

From $450 billion of assets under management (AUM) in 2005 to over $4 trillion by the end 2010, calling BlackRock's ( BLK ) growth as 'phenomenal' would be an understatement. Today, BlackRock is the largest asset management firm in the world offering investment advisory on equity, fixed income, multi-asset class and alternate investments to both retail and institutional investors in over 100 countries across the world.

BlackRock competes with other investment management services companies and banks with asset management operations, which serve both institutional and retail investors, such as State Street ( STT ), Fidelity Investments, Goldman Sachs ( GS ), Morgan Stanley ( MS ) and UBS ( UBS ).

We currently estimate that equity investments make up for over 27% while fixed income investments constitute close to 16% of our $184 Trefis price estimate of BlackRock's stock , which is around 5% below its current market price. Alternate investments comprising of investments in currencies, commodities, hedge funds, private equity funds, etc. make up almost 23% of BlackRock's stock value as per our Trefis price estimates. This is combined with BlackRock's healthy balance sheet with net cash and proprietary investments contributing just over 4% and 1% to its stock respectively.

Transition from Bond Powerhouse to Asset Management Titan

BlackRock has achieved astounding growth rate above 50% year-on-year by making some strategic and transformative acquisitions along the way. Here, we explore BlackRock's rise over the last five years, to its current enviable market leadership position.

BLK started out as a fixed income specialist with fixed income investments making up 67% of the total assets under management and equity investments, 8% of the total assets under management till 2005. The acquisition of Merrill Lynch Investment Management in 2006 swelled assets under management three-fold to $1.2 trillion and increased BlackRock's presence in the equity space with equity investments now making up 28% and fixed income, 40% of the total assets under management.

The acquisition of Barclays Global Investors (BGI) in December 2009 not only expanded the assets under management from $1.3 trillion in 2008 to over $3.3 trillion but also tilted BlackRock's equity portfolio towards passive investment management. While active investment involves an asset manager making investments with the aim of outperforming a benchmark index, passive investment requires an asset manager to replicate the benchmark index by incorporating the constituent assets in similar proportions (weights) and thereby matching the returns of the index. After the BGI acquisition, equities became the largest asset class making up over 45% of BlackRock's assets under management, of which 77% were under passive management. The fixed income investments now constitutes around 31% of the total assets under management with 43% of the fixed income investments under passive management.

Why the quest for scale?

Scale enables BlackRock to spread costs associated with personnel and technology setup over a larger asset pool and investor base letting it charge a more competitive investment advisory fee while maintaining higher operating margins.  Present across all asset classes and investment strategies, BlackRock can offer investors the option to move their investments within, thereby keeping a check on fund outflows. The retention of investments is crucial since, while the global assets under management have been growing at around 12% year-on-year, only about 1% comes from net inflows with the remaining resulting from market appreciation. A presence across markets also lets BlackRock construct a more diversified and customized assets portfolio for its clients.

We believe, the increased proportion of equity as an asset class and passive investing as an investment strategy presents much upside to BlackRock. Asset managers earn a markedly higher advisory fee from active investment strategy and rightly so as active management relies on the skill of the asset manager which needs to be duly compensated with a higher advisory fee. Active portfolio management also requires more trading and so the higher fees also help account for this.

In the current economic conditions, amid much uncertainty while the financial markets recover, indexed investments diversify the risk associated with investing in fewer specific assets and cost less to the investor than active management strategies. Hence, passive investments in equity and fixed income have been growing more rapidly by attracting inflows not only on account of lower fees but also the diversification it offers. We believe that BlackRock has identified this trend as an important source of growth and scale, which helped to justify the BGI acquisition.

Looking ahead, Blackrock has diversified its business in such a way to benefit from the trend toward passive management and created many sources of revenues so that if investors want to shift among different strategies and asset classes, they can do all of this under one roof.

You can see our detailed analysis of $184 Trefis price estimate for BlackRock's stock here .

Visit our home page at trefis.com for details on how to win a free iPad.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BLK , GS , MS , STT , UBS

Trefis

Trefis

More from Trefis:

Related Videos

Stuck
Stuck                               
Yoga Surfer
Yoga Surfer                         

Stocks

Referenced

Most Active by Volume

89,851,277
  • $17.05 ▲ 0.12%
61,694,953
  • $39.05 ▲ 1.03%
61,622,467
  • $102.64 ▲ 1.56%
56,476,509
  • $3.48 ▼ 1.14%
49,282,352
  • $5.31 ▲ 3.91%
37,301,083
  • $87.17 ▼ 3.03%
36,192,897
  • $78.29 ▲ 1.94%
33,401,171
  • $38.83 ▼ 1.89%
As of 9/23/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com