BlackRock Asset Management – Are They Too
Big?
The Dynamic Wealth Report
January 7, 2011
Today I want to talk about people who handle your money. No, I’m
not talking about your bank teller, or the bank that holds your savings
or checking account. I’m not even talking about your broker dealer or
your trading accounts.
What I want to take a closer look at are asset managers!
What are asset managers? Put simply, asset management is when you hand
over your nest egg to a financial guy and let him invest your money.
He’s not a broker… he’s not recommending trades. He’s an asset manager
and he actually divvies up and puts your money into different
investments.
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These guys run mutual funds – like Bill Miller at Legg Mason, or bond
funds like Bill Gross of PIMCO.
When you give your money to an asset manager, it’s important you buy
into the manager’s strategy and investment process.
While many of the more popular asset managers (think Fidelity) are
funded with retail investors’ money, a lot of the BIG money comes from
institutions. These are groups like endowments, insurance companies, or
family offices. Institutions typically have multi-billion dollar
portfolios and need to make investments.
So if you have a few billion to invest, who do you trust with your
money?
Right now, there’s one firm that leads all others in terms of money
management - BlackRock (BLK). Maybe you’ve heard of them. The company
was founded by a bunch of “bond guys” back in 1988. Today the company
manages assets in excess of $3,450 billion…
YEP, that’s just over $3.4 trillion!
It’s a lot of money. Of course, there are different strategies and
investment types. In the case of BlackRock, more than $1 trillion of
their assets under management are held in ETFs.
You might even own a piece of a BlackRock ETF. If you own an iShare ETF,
those are funds managed by BlackRock.
So here’s the question many investors ask… How does BlackRock make their
money?
It’s simple really. BlackRock charges a small percentage fee on all the
money they manage. Some fees are tiny, say one quarter of a basis point
(0.25%). Others can run as high as 1% or 2% of assets or more. Those
higher fees are normally from very specialized funds.
Last quarter BlackRock posted revenue of just over $2 billion. That’s
up over 84% from the same quarter last year. And their net income surged
83% in the same time period to $537 million. Not bad at all.
But here’s the million dollar question…
Is BlackRock stock a good investment? Should you swoop in and buy it
now?
Before I answer that question, consider this… the company has only one
of two ways to increase revenue…
One is to increase their fees. But that’s not going to be a popular move
with customers. And if recent history is any guide, fees are moving
steadily lower in the industry… not higher.
The other way BlackRock can increase revenue is by gathering more assets
under management. It sounds like a simple thing to do, but in practice,
it can be quite difficult. Just a quick eyeball on their numbers and
you can see, to double revenue in short order, the company needs to
double assets.
That means they need to gather more than $6.8 trillion in assets.
Keep in mind, that’s more than the annual GDP of Japan! That would make
BlackRock larger than the third largest economy in the world. How likely
is that?
While BlackRock is a solid company with a strong business model, their
growth prospects look muted. Going forward, I see the company settling
into a slow and steady growth rate of 3% to 5%... nothing stunning.
You need to look at BlackRock as a steady dividend payer, not as a fast
grower.
But frankly, their dividends look quite weak.
For a company with over half a billion in net income a quarter, their
dividend yield is a paltry 2.1% per year. With the average P/E for the
S&P 500 around 15x, BlackRock’s current P/E ratio of 21x is a bit rich.
It’s a great company and one worth monitoring. Watch the stock and if
we catch a big drop or we see their dividend jump up, we might give
them a closer look. But for now I’d avoid this stock.
• Continental Resources (CLR)
was upgraded by Ticonderoga to a buy rating and given a $67 price
target. The oil and gas exploration company’s stock is climbing the back
of higher oil prices.
• Patriot Coal (PCX) was recently upgraded to a
buy rating by BB&T Capital after the news of flooding in Australia will
hamper coal output. It’s a positive event for PCX and should drive the
stock higher.
• Argus initiated coverage on Motorola Solutions (MSI)
with a HOLD rating. The stock was just spun off from Motorola yesterday.
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