State Street Gains from Shift to Passive Funds, Raising Estimates to $47.80
State Street (NYSE:STT) is one of the leading financials services firm providing investment servicing and management to institutional investors such as mutual funds, insurance companies, corporations and retirement funds in over 100 financial markets across 26 countries around the globe. With over $21 trillion worth of assets under custody & administration (as of Dec 2010), State Street is the second largest custodian of financial assets, after BNY Mellon. State Street Global Advisors (SSgA) also provides investment advisory on over $2 trillion worth of assets and competes with BlackRock (NYSE:BLK). Fidelity Investments, Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and UBS (NYSE:UBS).
State Street’s earnings prompted a mixed response from investors and shares drifted lower by 8%. The general market sentiment has been that of cautious optimism, and this became more evident with investors increasing their exposure to passive funds. Passive equity investments increased 30% from $504 billion in 2009 to $655 billion in 2010. Investments in ETFs also exhibited similar growth of over 24% from $205 billion in 2009 to $255 billion in 2010. However, active equity investments shrunk by 17% from $66 billion to $55 billion over the same period. [1] The low investment advisory fee (%) on passive investing (on an index) compared to that on active investing, was partly compensated by an improvement in equity market valuations with a recovery in financial markets across the globe.
State Street is primarily a custodian of financial assets and charges a commission (termed as the servicing fee) as a percentage of the daily valuation of assets under custody and administration for rendering services such as custody (which is nothing but the physical and electronic safekeeping and record-keeping of securities), daily pricing of collective investments such as mutual funds and outsourcing of back office operations from other financial services providers. Servicing fee revenues were up 18% in 2010 from 2009, mainly due to the acquisition of new businesses – Intesa and Mourant International Financial Administration (MIFA) in 2010. The rising value of underlying financial securities also benefited these fees. The servicing fee makes up close to half of our $47.80 Trefis price estimate of State Street’s stock, which is around 10% ahead of the current market price.
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A noteworthy development in 2010 was the realization of $344 million pre-tax losses in the fourth quarter, associated with the sale of approximately $11 billion of mortgage and asset backed securities. This sale was in connection with a repositioning of State Street’s proprietary investment portfolio so as to reduce exposure to certain asset classes and hence improve the capital ratios in line with the evolving regulatory capital standards.
You can see a detailed analysis of our $47.80 Trefis price estimate of State Street’s stock here.
Notes:- Taken from SEC filings [↩]