BlackRock looks for new profit rockets as rivals play defence

When the pandemic knocked US stocks from record highs in February, Paul Stappard, a portfolio manager for Deltec, a private bank, scoured the stock market for companies with a record of prospering during big bouts of upheaval. He landed upon a surprising candidate: BlackRock, the world’s largest fund manager.

Though tumbling markets typically cause fund managers’ assets and fee income to shrink, BlackRock has a history of outpacing its peers and the S&P 500 index of blue-chip stocks — and it has done so again this year, snatching market share as equity prices first slumped and then recovered.

By Wednesday’s close, its stock was up 30 per cent, year to date, versus a 7 per cent gain for the S&P 500. The fund management sector is down 3 per cent as a whole this year.

If you look back through the [technology boom] and the great financial crisis, BlackRock outperformed its peers and its profits rose,” Mr Stappard said. “It has demonstrated over and over again the robustness of its business model.”

The company was a fixed-income specialist at the time of the dotcom crash — picking up investors who fled the stock market and enjoying the bond rally sparked by sharp interest rate cuts — before merging with Merrill Lynch’s fund management arm to broaden its equities exposure.

The hit to the big banks from the 2008 financial crisis allowed it also to swoop on Barclays Global Investors, then the world’s largest fund manager, in time for the longest bull market in equities since the second world war. That acquisition included iShares, the exchange traded fund unit that has grown seven-fold on the back of a massive shift to passive investing and now accounts for a third of BlackRock’s assets.

The iShares unit now accounts for 40 per cent of global ETF assets, but assets were still growing at an annual rate of 13.4 per cent in the third quarter as Asia and Europe played catch-up with the US in the trend to passive.

BlackRock amounts to a perpetual reinvention machine that has continually added new sources of growth, most recently from technology services to investors, including chunky contracts for its Aladdin risk management platform. Its $1.3bn acquisition last year of eFront, a risk analysis company, was the biggest deal for BlackRock since the Barclays purchase.

The combination of economies of scale from client inflows and these new tech revenues allowed BlackRock to set a new record for operating margin in the third quarter, which at 47 per cent would draw the envy of the tech companies that have led the market this year — but it raises the question of what BlackRock might do to expand its business from here?

The company has been conspicuously absent from a round of industry consolidation among fund managers. In February Franklin Templeton acquired Legg Mason and last month Morgan Stanley agreed to buy Eaton Vance, two major deals in part aimed at getting the kind of economies of scale enjoyed by BlackRock and the ability to sell a broader bundle of products to investors.

Analysts do not expect such defensive deals from BlackRock. Instead, they are focused on potential areas of expansion including two of the hottest corners of the fund business — alternative investments such as private equity and the rapidly expanding Chinese market.

Source: Financial Times