Now that BlackRock Inc. has become the elephant in the room, the New York-based money manager plans to spend 2010 expanding internationally, developing its exchange-traded fund and defined contribution businesses.
Following the completion of its $13.5 billion acquisition of Barclays Global Investors, which closed in December, BlackRock more than doubled its assets under management to $3.3 trillion from $1.3 trillion a year earlier and became the industry’s largest money manager by assets as it leapfrogged Bank of America Corp. in the process.
The company, which more than tripled its profits in the fourth quarter to $256 million, or $1.62 per share from a year earlier, is well-positioned for growth this year, Laurence D. Fink, BlackRock’s chairman and chief executive officer, said during the company’s fourth quarter earnings conference call on Wednesday.
Analysts said as other large financial services companies focus on core businesses, BlackRock is positioned to expand. “The competitive environment is favorable for BlackRock,” J. Jeffrey Hopson, an analyst at Stifel Nicolaus, said in an interview Wednesday. “The global market sell off has hurt everything, especially smaller companies. From a competitive standpoint, BlackRock is in a position to pick up share because of the problems that competitors are facing. … This is a year for the larger, stronger companies.”
BlackRock wants to increase its share internationally, Fink said, specifically in Latin America and Asia. As of Dec. 31, 40% of its assets are held outside of the United States. “The amount of business in the non-U.S. space is growing dramatically,” Fink said. “This is where we plan to invest in the future,” he said. “We will continue to spend money investing overseas, especially in Latin America and Asia.”
The company also wants to develop its defined contribution business and its exchange-traded funds platform, Fink said. With the acquisition of Barclays, BlackRock acquired Barclay’s iShares ETF platform and became the dominant player in the ETF. IShares manages more than $500 billion in ETF assets. In the fourth quarter, the platform generated $21 billion of BlackRock’s $85 billion in net inflows.
Returns for exchange-traded funds have been strong thus far this year, Fink said, despite the fact that “traditionally, ETFs have strong fourth quarters and weaker first quarters.” Fink added that ETF flows have been “pretty resounding” this month.
Fink said actively managed exchange-traded funds remain a “very large growth area” and the company also sees an opportunity to add some international ETFs. BlackRock wants to be “vigilant,” he said, as it develops new ETFs so that they can “meet the test of time.”
Stifel’s Hopson said BlackRock has “overwhelming momentum right now, especially in ETFs.” But other analysts said BlackRock will lose some share in the ETF business as new competition enters the fray. Last year, nine companies began offering ETFs, entering a market long dominated by a handful of large providers, as the total number of funds increased last year by 10%.
Currently, iShares is the dominant player in the ETF space as it manages 49.3% of all ETF assets.
But Fink admitted share may decline for iShares as new players enter the fray, but “having been the first mover and our scale will remain a dominant reason people continue to use iShares.” Fink added that BlackRock welcomes all comers. “We are not frightened of competition and believe there is room for many more competitors.”
Fink said that there are a lot of synergies between iShares ETFs and BlackRock’s legacy proprietary mutual funds. “The one real surprise in this integration,” he said, “is how strong the connections are and the opportunities to” develop business “in the retail space with beta and alpha products working together.”
In the defined contribution space, Fink admitted that BlackRock will “never be as large as some players,” but there is an opportunity to sub advise more products in that space.
Fink said the company is working with insurance carriers to develop more defined contribution products. More companies, he said, are adding BlackRock’s products to its menu of investment offerings in 401(k) plans.
“We have a dedicated DC team that we are building out,” Fink said. “This is an area that we are underinvested in and we believe that we didn’t have the appropriate scale. Today, we have the scale and we have made the investments to be a player in the future.”
BlackRock wants to expand all of its product groups, but it remains realistic, Fink said. It remains “bullish,” he said, about real estate investments despite recent “bad press.” On Monday, BlackRock announced that it and Tishman Speyer Properties LP would cede control of Stuyvesant Town-Peter Cooper Village to lenders after the value of the New York housing complex fell and they were prevented from raising rents.
Fink said BlackRock wrote off the investment in 2008. “We are not perfect,” he said. “We have to rebuild, rebalance and fix what needs to be fixed. Real is something that we believe in—in the long run.”
The company’s quantitative equity strategies also remain “under stress,” Fink said. The sector had $10 billion of outflows in the fourth quarter, but he said, “We still believe it is a great space despite the large outflows.”
BlackRock continues to look for other ways to expand its business. Last week, it announced it bought Hielix Financial Group, which it plans to integrate into BlackRock solutions.
Fink described the acquisition as a “little” product with a “huge opportunity.” Hielix offers a product that analyzes commercial mortgage backed securities. Fink said the software will allow investors to analyze every loan in a portfolio.
“I think one of the outcome of the credit crisis was that we realized that we relied too heavily on rating agencies,” Fink said. “Hielix allows investors to analyze their commercial mortgage backed securities investments and understand all of the loans and how they perform. … This is a little acquisition that will drive a lot more opportunities.”
On Wednesday, BlackRock reported earnings of $256 million, or $1.62 a share, compared with $52 million, or 39 cents a share, a year earlier. Excluding certain items related to the acquisition, earning rose to $2.39 on revenue of $1.54 billion, up 45% from a year earlier. This beat analyst estimates of $2.10 a share on revenue of $1.25 billion, according to Thomson Reuters.
Stifel’s Hopson said BlackRock’s results were “solid across the board” as Barclays earnings contribution were above expectations. “Given the momentum in their businesses,” he said, “there is no reason they can’t be successful from here.”
BlackRock expects a strong 2010 as investors move money from cash to other products, Fink said. Already this month, there has been strong flows into equity products, he said, especially on the global front. Fink said flows this month are “way over $1 billion” and most of the assets are moving to equity products.
He added that the closing of the Barclays acquisition went very well, despite some "mistakes" and “miscommunication along the way.” He said he doesn’t expect to have the integration completed for about two years. “Integration is hard and we’ll have more bumps along the way,” Fink said. “We are on target and on schedule.”
