BlackRock - The ETF Powerhouse
August 22, 2017
Stock at $415; symbol BLK
Company Description:
BlackRock provides diversified investment management services to institutional clients and to retail investors through various investment vehicles. The company manages funds and also provides risk management services to fixed income institutional investors.
Company Background:
BlackRock is led by CEO Laurence Fink, who has overseen a string of major acquisitions in recent years, expanding into private equity, real estate, energy, and hedge funds as investors look to diversify beyond stock and bond funds.
Fink engineered a blockbuster merger with Barclays Global Investors in 2009. In the deal, which was several years in the making, BlackRock bought Barclays Global Investors from UK banking giant Barclays for $15 billion. Barclays Bank retained a 20% stake in the combined firm, but Fink remained in charge of the enterprise. The merger nearly tripled BlackRock's assets under management and propelled the company to the top of the international money management industry by enhancing its investment and risk management capabilities. The deal also gave BlackRock a much larger footprint outside the US and added more than 3,500 new employees.
Overview:
With some $5.7 trillion in assets under management, BlackRock is the world's largest public investment management firm. It specializes in equity and fixed income products, as well as alternative and multi-class instruments, which it invests in on behalf of institutional and retail investors worldwide. It does not engage in proprietary trading. Clients include pension plans, governments, insurance companies, mutual funds, endowments, foundations, and charities. BlackRock also provides risk management services through BlackRock Solutions and is a leading provider of exchange-traded funds (ETFs) through iShares. The firm has offices in more than 30 countries and has investments in some 90% of the Fortune 100.
Operations:
BlackRock manages some $5.7 trillion in assets through 135 investment teams. The BlackRock Solutions division provides risk management, advisory, and enterprise investment system services. iShares, one of BlackRock's brands, is a leading provider of exchange-traded funds (ETFs). BlackRock's risk management technology platform, Aladdin, is used by over 25,000 investment professionals around the world.
The company offers active and passive retail investment services. Mutual funds account for the majority of retail investors’ assets, specifically about 80%. Retail has a US and an international arm.
BlackRock's iShares is the world's largest ETF in the world, with $1.3 trillion in assets under management. iShares also operates in the US and internationally.
The company possesses $2.9 trillion in institutional assets, of which $1.9 trillion are index funds and $1.0 trillion which are actively managed like Large Cap Growth, Mid Cap Value, etc. In other words, not ETFs. Their clients consist of pensions, foundations, and endowments, official institutions, and financial and other institutions.
Geographic Reach:
New York-based BlackRock has more than 70 offices in more than 30 countries. The company makes 66% of its revenue in the Americas. Europe accounts for nearly 30%, and the Asia-Pacific region 5%. BlackRock has clients and investments in more than 100 countries.
Sales and Marketing:
BlackRock serves 21 out of the 25 largest endowments and foundation organizations in the US. It also serves around 90 of the Fortune 100 companies, and more than 90% of the largest US retirement plans.
The firm focuses on establishing and maintaining its investment management relationships by marketing its services through financial professionals, pension consultants, third-party distribution relationships, or directly to investors themselves.
Clients include tax-exempt institutions such as defined benefit pension plans, charities and foundations; official institutions (central banks, sovereign wealth funds, supranationals and other government entities); and taxable institutions (insurance companies, financial institutions, corporations and third-party fund sponsors, as well as and retail investors).
Financial Performance:
Thanks to a rising stock market and a growing investor base, BlackRock has quadrupled its assets under management since 2007 -- from $1.3 trillion to $5.1 trillion at the end of 2016 -- which has led strong fee and advisory income growth over the past few years.
Revenue declined slightly in fiscal 2016, falling 2% to $11.2 billion due to lower investment advisory performance fees from equity and alternative products. Weakness was offset to an extent by stronger Aladdin revenue.
Net income fell 3% to $3.2 billion on the back of lower revenue. Cash flow from operations fell 28% to $2.2 billion due to a non-operating item not a part of the regular day-to-day business. But revenues and earnings were strong in the first part of 2017.
Strategy:
Even powerful fund managers' jobs are not immune to the threat of automation. In 2017, BlackRock sacked seven portfolio managers as part of a wider shift away from active stock pickers and towards a robot-led quantitative approach. Amid relative market stability, active fund managers are less able to beat the market than passive trackers. Investors pulled some $40 billion from actively managed funds on Wall Street during 2016. The robo-funds can be offered at a lower price than the more expensive, hand-picked investment funds.
Part of the shift to automation includes the transfer of $1 trillion in assets under custody of State Street to JP Morgan in 2017 which will cut operating expenses. JP Morgan has been investing in automation technology, enabling a less expensive provision of services.
Mergers and Acquisitions:
In 2017, BlackRock acquired First Reserve Energy Infrastructure Funds with $10 billion under management. The acquisition will help connect BlackRock's clients with energy infrastructure projects.
In 2016, BlackRock Real Assets added to its wind generations holdings with the purchase of GE Energy Financial Services' 50% interest in the Grandview wind project in Texas. BlackRock's renewable energy assets have 2 GW of generating power.
BlackRock expanded its presence in Mexico with the 2015 purchase of Infraestructura Institucional, the country's leading independently managed, infrastructure investment firm. The acquisition opens up infrastructure investments in Mexico to BlackRock's clients.
In 2015, BlackRock agreed to buy Bank of America's $87 billion-money market fund business, boosting its global cash-management business by 30% to $370 billion in assets under management. The deal comes as Bank of America and other large banks have faced regulatory pressure to simplify their businesses in the years following the global financial crisis. BlackRock was happy to oblige. BlackRock is the world's largest asset manager with $5.7 trillion in assets ..
Financial Outlook:
BMR Take: BlackRock is a compelling value trading at 17x next year’s consensus EPS estimate of $25. But don’t take it from just us. One of the world’s best hedge funds, Third Point, just bought the stock and believes BlackRock is a "misunderstood franchise" with a massive 38% market share of exchange-traded funds. Third Point’s CEO said he thinks this acceleration in ETFs is just getting started and BlackRock is valued like a traditional asset manager, but it has much greater potential for structural revenue growth and operating margin expansion.
