BlackRock Asset Management – Are They Too Big?

| January 7, 2011 | 0 Comments

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.

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.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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