Investors Played It Safe With Their ETF Bets In April: BlackRock

According to data released by asset management giant BlackRock (NYSE:BLK) last Wednesday, investors chose to take on less risks in their investment portfolios in April – picking fixed-income ETFs over equity ETFs. ^[1] This marks a notable shift in investor preference compared to the first quarter of the year when there were significant outflows from debt ETFs to global equity ETFs. The fact that the U.S. government bond ETFs saw huge demand last month only highlights the growing aversion to risk among investors.

The global ETF industry is dominated by BlackRock and its competitors State Street (NYSE:STT) and Vanguard, and on most occasions, investors shift their investments from one type of ETF to another with the same provider. So, the shifting investor preference would not really have any negative impact on the total assets that these giants manage under all their ETF offerings put together. However, the trend will lead to a reduction in fee revenues generated by them for this quarter as equity funds attract more fees than their debt-based counterparts.

We maintain a $267 price estimate for BlackRock’s stock, which is slightly ahead of the current market price.

See our full analysis for BlackRock

The importance of equity funds to BlackRock’s business model becomes evident at once from the chart above, which shows that nearly half of the asset management firm’s value comes from equity investment options. This includes actively managed equity funds, passively managed equity funds as well as BlackRock’s extremely popular equity iShares.

The size of the assets in all these three equity offerings has increased considerably over the recent quarters – jumping from $1.64 trillion at the end of Q2 2012 to just under $2 trillion at the end of Q1 2013. On the other hand, assets in fixed-income funds have hovered around $1.25 trillion since Q4 2011 with marginal quarter-on-quarter changes.

But this cash flows trend witnessed for equity & debt funds over the recent quarters might reverse if investors continue to switch over to less risky investment alternatives.

So how will this affect BlackRock? The company will end up with lower fee revenues in such a scenario due to lower fees attached to the fixed-income funds. To put things in perspective, BlackRock’s fee revenues from equity iShares as a percentage of fund assets was 0.4% in 2012 compared to 0.22% for fixed-income iShares. This indicates that fixed-income funds generate about half the fees compared to equity funds for the same asset size.

What remains to be seen is whether investors’ risk aversion in April was a temporary event or the beginning of a new trend in the global asset management industry.

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1. April ETF Flows Show Rising Caution: BlackRock, The Wall Street Journal, May 1 2013 [↩]