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Equity Investments constitute 39% of the Trefis price estimate for BlackRock's stock.
Fixed Income Investments constitute 22% of the Trefis price estimate for BlackRock's stock.
Alternative Investments constitute 12% of the Trefis price estimate for BlackRock's stock.
WHAT HAS CHANGED?
In Q1 2021, BlackRock reported Total Revenues of $4.4 billion, up 19% y-o-y. The improvement can be attributed to an 18% increase in base fees coupled with a significant jump in performance fees. Further, the company reported $172 billion in net inflows for the quarter.
Impact of coronavirus outbreak
BlackRock stock has gained more than 100% since the March 23 lows in 2020, mainly driven by better than expected results in each of the 4 quarters of 2020 due to recovery in global financial markets which improved the asset valuations and took Assets under Management (AuM) to record highs. Its full-year 2020 revenues have increased by 11% y-o-y and the company has reported a whopping $391 billion in net inflows for the year. The same trend was evident in the Q1 FY2021 results and we expect the momentum to drive Q2 results as well.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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 iShares: 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 $1.6 trillion in 2020. The company is also planning on expand its offering of ETFs tracking proprietary indices, which will differentiate it in an increasingly saturated market. We forecast equity ETFs increasing to about $2.25 trillion by the end of our forecast period. However, should the market become more competitive and low-cost competitors take share, the growth rate of these assets could fall to as little as 2% annually from the 5.4% figure we currently forecast. This would result in a downside of about 4% to the Trefis price estimate.
BlackRock's EBT Margin: This represents BlackRock's pre-tax company-wide operating margin. The figure has grown steadily over the years to 40% in 2016,before coming down to 38% in 2018. It again increased in the subsequent years and was around 40% in 2020. Going forward, we expect the figure to gradually increase over the Trefis forecast period. However if increased pressure from competitors and higher costs related to attracting more retail investors weigh on margins, then the figure could fall to 39% by the end of Trefis forecast period. This could result in a 15% downside to our price estimate for the company's stock.
BlackRock is the world’s largest asset management firm, with Assets under Management (AUM) of almost $7.6 trillion in 2020. 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.
SOURCES OF VALUE
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 roughly 0.6% for active equity investments compared to about 0.2% for active fixed income.
Government policy uncertainty and detoriariting bond yield can hurt fund inflows
Although equity market valuations have improved in recent months, government policy uncertainty and poor earnings outlook would constrain its growth. Further, detoriariting bond yields could hamper the growth of Fixed income segment. This could have a negative impact on the market value of BlackRock's investments, resulting in a decrease in assets under management and consequently lower fees. Additionally as market volatility increases, we expect that investors will be more risk-averse, reducing 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.
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