BlackRock Looks To Steady Its Flagging Active Equity Business

Asset management giant BlackRock (NYSE:BLK) has reportedly kept itself busy since mid-2012 trying to get to the root of the performance issues exhibited by its equity funds unit over the recent years. ^[1] The world’s largest asset manager has made significant changes to the management teams handling its actively-managed equity funds and is now waiting for these changes to reflect in the performance of the funds.

While actively-managed funds have no doubt fallen in investor preference over the recent years to give way to passively-managed and exchange-traded fund options, BlackRock witnessed a more severe outflow of cash from these funds in comparison to its competitors like Vanguard and State Street (NYSE:STT) as most of its active equity funds were under-performing peers by a notable margin.

We are in the process of updating our $267 price estimate for BlackRock’s stock to include the impact of a recently announced acquisition (see BlackRock Expands Its Asian Real Estate Presence With MGPA Deal).

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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.

But not all of these three fund types have similar assets under management. In fact, as can be seen clearly from the table below which shows BlackRock’s equity fund assets at the end of each quarter of the last nine quarters, active equity funds have contributed towards a smaller and smaller part of the company’s growing asset base in the recent past. At the end of last quarter, actively-managed equity funds contributed to under 15% of the nearly $2 trillion in equity assets BlackRock managed. That’s just over 7% of the almost $4 trillion total asset base for BlackRock.

The actively-managed equity funds are an important driver of the firm’s top-line figure though, because these funds demand much higher fees than their passively-managed and exchange-traded counterparts. To put things in perspective, BlackRock earned fee income equal to 0.61% of total assets in the actively-managed funds last year compared to just under 0.4% from equity iShares and the considerably lower 0.06% from passive equity funds. The active equity funds also bring in performance fee revenue for the company over and above the management fees.

The importance of these funds combined with the fact that they reported a marked decline in fees as a percentage of assets managed (shown in the chart below) is what likely prompted the widespread changes in the funds’ management. While increasing competition among the incumbents in the industry along with a slowing demand for active funds among investors already point towards lower fees in the future, BlackRock is rightly looking to improve the performance of these funds to remain competitive. What remains to be seen is how the turnaround actually shapes up for the company over the coming months.

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1. BlackRock Equity Headache Persists, The Wall Street Journal, Jun 13 2013 [↩]