BlackRock Adds Some Kick To Its Portfolio

Aug.22.11 | About: BlackRock, Inc. (BLK)

BlackRock (NYSE:BLK) had a robust second quarter of 2011 like the first quarter, but we believe that weakening equity and debt markets will hurt BlackRock’s performance in the second half of the year. BlackRock’s performance has outperformed peers such as State Street (NYSE:STT) and Northern Trust Corporation (NYSE:NTRS) in the first half of the year. Revenue growth was attributable to increased asset management fees across all asset classes as BlackRock was able to raise its fees in 2010 and 2011 to pre-crisis levels. Also new products such as customizable multi-asset offerings are providing a new leg of growth.

We have a $190 price estimate for BlackRock, which is about 15% above the market price.

Negative Sentiment is Weighing on Asset Managers

The global equity markets have performed negatively in last few quarters due to European debt crisis, slower than expected US industrial production and high unemployment and inflation in developed economies.

(Chart created by using Trefis' app)

We expect investors to reduce their portfolio risk by increasing the allocation to fixed income products and cash equivalents and reduce the allocation to equity and alternative investments. We also expect investors to be conservative and invest in passively managed funds rather than actively managed funds, which are more expensive.

Passively managed products and fixed income products earn lower asset management fees compared to actively managed and equity products respectively. As we expect investors to shift their assets to passively managed and fixed income products, BlackRock will see a significant drop in its revenues. The operating costs of BlackRock are also expected to increase slightly because of high inflation and investment in technology.

(Chart created by using Trefis' app)

The New Growth Driver

BlackRock has rapidly expanded the multi-asset class offering after acquiring Barclays Global Investors for its clients with unique risk-return requirements. Multi-asset class products are diversified across equities, bonds, commodities, currencies and countries. Creating and maintaining such large customized portfolios is complex and BlackRock has little competition in the segment. This allows BlackRock to charge high asset management fees on these portfolios.

(Chart created by using Trefis' app)

We believe BlackRock is significantly innovating to grow its assets under management base by offering new products and services that suit clients needs more in the volatile markets. BlackRock’s presence across all major developed and emerging economies gives it an extra edge to gather new clients and create unique client solutions. Hence, we expect BlackRock to perform tremendously well with the rebound of equity and debt markets.

Disclosure: No positions