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Investment Overview for BlackRock (NYSE:BLK)
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Below are some key drivers of BlackRock's value that present opportunities for upside or downside to the current Trefis price estimate:
- BlackRock's Assets Under Management in Equity Exchange Traded Products: This represents the total assets invested in BlackRock's equity-based exchange traded funds (ETFs) under its iShares brand. ETFs are publicly traded funds that generally track an index such as the S&P 500. BlackRock's market leading position and broad offering have allowed its equity ETF assets to increase to almost $500 billion. The company is also planning on offering ETFs tracking proprietary indices which will differentiate it in an increasingly saturated market. We forecast equity ETFs increasing to almost $850 billion by the end of our forecast period. However, should the market become more competitive and low-cost competitors take share, BlackRock's assets could remain about flat, which would result in a downside of about 5% to the Trefis price estimate.
- BlackRock's Fee as % of Multi-Asset Class Investments: This represents BlackRock's fees for multi-asset class investments, which utilize a combination of equity, fixed income and alternative investments, expressed as a percentage of assets under management (AUM). Over recent years, these fees have been around 0.4% of AUM. We forecast fees declining to around 0.35% by the end of our forecast period as we expect competition to pressure pricing. However if BlackRock's brand, track record and product offering allow it to keep fees relatively flat at 0.4% going forward, then it could result in a 5% upside to our price estimate for the company's stock.
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BlackRock is the world’s largest publicly traded asset management firm, with Assets under Management (AUM) of nearly $3.8 trillion as of year-end 2012. BlackRock offers equity, fixed income, multi-asset class, alternative investment and cash management products along with BlackRock Solutions risk management and advisory services.
BlackRock has a global footprint, with employees in over 24 countries, retail and institutional investors in over 100 countries, and investments in capital markets across the globe. BlackRock ranked fourth in terms of global AUM in 2008, before its 2009 acquisition of Barclays Global Investors made it the world's largest asset manager.
BlackRock's services are broken down into the following categories: Equity Investments, Fixed Income Investments, Multi-Asset Class Investments, Currencies & Other Alternative Investments, Advisory Services, Cash Management and Distribution Fees & Other.
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BlackRock's Equity Investments division is its most valuable according to Trefis estimates, followed by Multi-Asset Class Investments. These divisions are valuable for the following reasons:
Scale and Scope of Operations
BlackRock is the world's largest asset manager, with a global presence and a very well established brand. The company's scale allows it to spread fixed costs over a larger asset pool thus enabling it to charge competitive fees. The company's diversified product offering and strong track record allow it to retain customer funds while consistently generating investor fund inflows. This diverse product offering also allows it to tailor investment products to its clients' needs, which contributes significantly to the value of its Multi-Asset Class Investments division.
Higher fees for equity products than fixed income
BlackRock is able to charge higher fees for its equity products than its fixed income products as equity investments are generally riskier than fixed income. Equity investments generally require more research than a fund investing in government bonds, for example. Additionally there are significant trading costs compared to many fixed income funds. However the potential returns are higher as well. BlackRock charges a management fee of more than 0.6% for active equity investments compared to less than 0.2% for active fixed income.
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Eventual economic recovery to improve valuations, drive fund inflows
As economic conditions eventually improve, equity market valuations should also improve, increasing the market value of BlackRock's investments. This will result in an increase in assets under management and consequently higher fees. Additionally as market volatility eventually subsides we expect that investors will be less risk-averse, driving investment.
Increasing investments from emerging markets
Emerging markets such as India and China, with high GDP growth rates and growing wealth, present a substantial opportunity for asset managers. As BlackRock is a market leader and has a global footprint it should be able to benefit from demand in these markets.
Changes in fee structure
Since many active managers have been unable to outperform the benchmark index consistently, and particularly since the financial crisis, many investors have demanded performance-based fees, as opposed to a fixed management fee that means the manager gets paid the same fixed percentage of assets regardless of returns. Performance fees better align the interests of managers and investors, and as such we expect a greater proportion of fees to be performance-based in the future. This could impact average fees as managers would be compensated less on a total basis in down years.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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