Growth Will Remain a Challenge for BlackRock in 2011

BlackRock (NYSE:BLK) ended 2010 with $3.5 trillion in assets under management (AUM). The largest asset manager in the world grew at a staggering rate of over 50% from 2005 to 2010 by pursuing strategic acquisitions including Merrill Lynch Investment Management in 2006, Quellos in 2007 and Barclays Global Investors in 2009. In  2010, BlackRock broadly focused on integrating assets and client accounts acquired from the Barclays acquisition and realized synergies that resulted in higher profit margins. BlackRock has benefited from a rise in passive investments and looks to expand its more profitable active management business going forward. We have a $205 Trefis price estimate for BlackRock here, which is slightly ahead of the market price.

Market Appreciation & Passive Investments Contribute to Rise in AUM

BlackRock’s total AUM grew by 6.4% year over year to $3.56 trillion in December 2010. Of this increase, $284 billion was on account of appreciation in the market valuation of financial securities while new business (net inflow of investments) amounted to about $57 billion.

Index and exchange traded products continued to be investors’ favorite. Investments of index linked products grew 15.4% to around $1.35 trillion in total assets in 2010, much of this in fixed income. Net inflows made up only about $89 billion of the increase while market appreciation on account of the broad macroeconomic recovery added another $144 billion.

Acquisition Led Growth in the Past

BlackRock’s acquisitions have not only expanded operations but also diluted operating expenses over a larger asset pool. BlackRock’s EBITDA margin has increased from around 39% in 2007 to 45% in 2009. The integration of Barclays Global Investors assets in 2010 has unlocked further synergies in operations thereby expanding the margins to 45%. With net inflows of investments and overall market appreciation, we expect economies of scale benefits resulting from an expanding asset base to keep margins at higher levels well into the future.

Looking Ahead

BlackRock has posted a consistent rise in margins over the past five years, but this has primarily been on account of scale benefits from acquisitions. However, post-merger integration expenses continue to drain some cash flows and while we’re accommodating for these adjustments in the short-term, we hope that BlackRock can curb these overhead expenses and draw more value from these acquisitions going forward.

Since BlackRock essentially makes money by charging commission on its AUM, which is influenced by net inflows and rising valuations in the recent past as well as operational improvements, its growth and profitability going forward could be hard to replicate.

See our full analysis of BlackRock here.