Earlier this year, PNC Financial Services sold its 22.4% stake — valued at $17 billion — ending a 25-years relationship between the mega manager and the bank. Deep-pocketed sovereign funds from Norway, Singapore and the Middle East were quick at picking up the offered shares.
Should retail investors follow the smart money? BlackRock and its closest peers manage assets worth $16tn. That compares with a world stock and bond universe which value is estimated at about $200tn, and leaves significant leeway for growth.
Interestingly, ETF inflows have shown no signs of let-up this year — a remarkable feat given the unprecedented disruption to worldwide economic activity and the widespread fear of an "indexing bubble". In fact, the New York group’s AUM jumped 13% this year.
The reality is that BlackRock has grown assets under management twentyfold over the past fifteen years, and that the so-called "big three" are still taking share in the industry. New growth opportunities are being explored in fixed-income and technology — BlackRock's Aladdin platform is gaining serious traction this year.
Beyond public markets, BlackRock's sights are on private equity and infrastructure investments. The world’s biggest asset manager has so far only dabbled in alternative investments. Moving there would make sense, for it would secure a slice of a higher-margin business and offset the ongoing squeeze on fees in public equities.
The group generates half of its revenue and operating earnings from passively-managed products — an exposure it built up after the highly successful acquisition of the iShares franchise eleven years ago, right in the midst of the great financial crisis. The sales pitch is easy — these products are lower cost and outperform most of their average actively-managed counterparts.
So why should investors look for the needle in the haystack when they can just buy the haystack? Passive management now accounts for a good half of total assets in U.S. stock-based funds, up from 20% a decade ago. That trend is also picking up in fixed income, with a 25% market share for both high-grade and high-yield funds.
Critics will contend that passively-managed products represent a shrinking margin business that has seen its peak in net new flows, with stiff competition leading to declining economies of scale. Adjusted for acquisitions, it is true that BlackRock's fees have compressed over the last five years.
In addition, while there are certainly strong merits to passive investing in markets where price discovery and volatility get suppressed by incessant flows of free money, the central banks' accommodating policies won't last forever. That could put a dent in the era of mindless indexing, and bring active management back into favor. This too shall pass, etc.
If the bull case has indeed played out, the mega manager may be an archetypal commodity business — on the verge of a fee squeeze and deserving no premium. But that has yet to happen, with the likes of BlackRock and Vanguard still topping the board of best-selling mutual fund managers globally, benefiting as investors flee active investment houses.
For instance, just last quarter, U.S. managers Invesco, Franklin Templeton, Pimco, T. Rowe Price and Capital Group, which are best known for actively choosing securities, all suffered net redemptions. In contrast, BlackRock gathered almost $74bn across its mutual funds, with its iShares arm accounting for the lion’s share of sales.
Earnings growth will vary from year-to-year as markets go up and down, and as the AUM mix fluctuates between fixed income and higher-margin equity products. But analysts — whose consensus is surveyed in real-time by MarketScreener — still assert that BlackRock is trading in line with the market when its moat and growth prospects should instead warrant a premium.
MarketScreener stands in their camp, as it just added the shares in its U.S. portfolio. Although market corrections usually provide the best entry points to buy an asset manager, in BlackRock's case, it should also create the perfect set-up for further consolidation — that is, a chance to replicate the supremely well-timed acquisition of iShares in another field.