BlackRock (NYSE:BLK) is a standout player in the asset management industry, offering growth potential for investors. The company’s robust organic growth in its iShares franchise has been a driving force behind its success. Additionally, BlackRock has significant opportunities for growth in the retail market, US retirement market, and through international expansion of its iShares offerings. Beyond these growth drivers, the company’s strong management, scale advantage, and technology edge make it a compelling investment option.
Business
BlackRock is a leader in the asset management industry, with its scale, multi-product offerings, global footprint, and technology. During times of crisis, BlackRock’s diverse exposure to asset classes and geographies has helped it avoid losses experienced by other financial institutions. The company’s rigorous risk management framework and strong reputation as a trusted investment manager have also contributed to its success during challenging times. BlackRock’s leadership in the ETF market and ability to launch new products during market uncertainty has further strengthened its position as a top investment manager.
ETFs
Exchange-traded funds continue to gain momentum, with a record year in fixed-income ETFs and management’s forecast for the fixed-income ETF market to triple in size over the next 5-plus years. BlackRock, with its leading market share, stands to benefit greatly from this growth. The company’s broad-based product line across fixed income, including governments, corporates, munis, and emerging markets, is a major advantage.
BlackRock’s ETFs continue to experience significant growth, with over $200 billion in flows this 2022 alone. The overall ETF industry, valued at $8 trillion, is expected to nearly double to $15 trillion over the next three years. This growth is driven by a number of factors, including the use of ETFs as building blocks for portfolios, growth in fee-based wealth, and the increasing popularity of ESG investments. Additionally, ETFs are being used as active instruments in portfolios, with institutional managers utilizing precision-based exposures to express risk preference.
Regarding direct indexing, we do not see it as a threat to ETFs but rather as a complement. Direct indexing provides customization options, such as tax and social preferences, to meet the needs of wealth managers. BlackRock’s acquisition of Aperio in early 2021 was part of its strategy to expand its distribution and has resulted in rapid growth. Aperio specializes in custom indexation, which is a form of direct indexing and is a complement to BlackRock’s ETF offerings. The acquisition of Aperio allowed BlackRock to expand its distribution and offer more customization options for its clients. With $200 billion in AUM growing at double digits, we are excited about the complementary nature of direct indexing to BLK’s portfolio.
We believe that Blackrock can meet the client’s needs in any way that they prefer, whether through a passive or an active investment. Currently, BLK has around $15 billion in active ETFs, with 20 ETFs primarily in fixed income and ESG, as well as a small presence in factors, thematics, and macro trends. The decision between passive and active investments comes down to whether the investor is willing to pay for the potential of higher alpha relative to the fee or if they prefer a passive benchmark.
Interest Rates
We believe that stabilizing rates at higher levels will be positive for fixed income. Private credit and infrastructure, for their income and uncorrelated returns, are also seen as positive. On the equity side, the defensive portion of income-oriented equities still has room to run, while equities, in general, are expected to face some challenges in 2023. Cash is also returning as a strategic asset due to its yield and its importance in funding private commitments.
It is important to note the shift in the composition of fixed-income allocations in portfolios. Historically, to achieve a 7.5% yield, 100% of it could be obtained with a fixed income allocation in the mid-90s, but it required 85% risk assets in the mid-2000s. Today, a portfolio consisting of 85% fixed income and 15% risk assets could potentially achieve that yield. This change is due to the rise in returns on the short end of the fixed-income market.
Financials & Valuation
In 2022, Blackrock’s revenue declined by approximately 8% compared to the previous year. This was due to a 14% decrease in assets under management (AUM). Despite this, the company managed to control its costs, evidenced by a 10% decline in earnings per share (EPS).
Looking ahead, analysts forecast an increase in AUM in 2023, with a predicted growth of 10.8% to reach $9.5 trillion. However, this growth is not expected to translate immediately to revenue, and EPS is expected to decline by 1.5%. This is due to the lag effect in the relationship between end-of-period AUM and revenue for Blackrock. Despite this, in 2024, the company is forecasted to grow its EPS by 14% to $39.73.
Despite its high forward price-to-earnings ratio of 20.4, which is at the upper end of its 10-year range, it is important to consider the lag effect in EPS growth when evaluating Blackrock’s valuation. Its premium to the S&P 500 is also at the high end of its 5-year range, but it is still trading at a more reasonable valuation than it appears on the surface.
Risks
Macro: A prolonged period of low economic growth or a recession could reduce capital accumulation over the long term, which in turn could negatively impact BlackRock’s AUM and revenue. In terms of the macroeconomic outlook, BlackRock’s management believes that a recession is imminent. With the current inflationary pressures in the market, the possibility of an overcorrection to control inflation could result in further pain in the equity market. Due to these factors, BlackRock predicts that volatility will persist for some time and that the firm will need to constantly adjust its portfolios in response to changes in the macroeconomic environment.
Interest rate: Another risk to consider is interest rate risk. BlackRock is a provider of investment management services, and its revenue is largely dependent on the size of its AUM. If interest rates rise, this can cause a decline in AUM as asset levels decrease, which in turn could reduce BlackRock’s revenue and earnings. This is because as interest rates rise, prices decline for both equities and fixed-income assets.
Conclusion
In conclusion, BlackRock is a standout player in the asset management industry with a strong competitive position, diversified portfolio, and reasonable valuation. The company’s scale, multi-product offerings, global footprint, and technology put it in a unique position to serve clients in any market condition. With a long history of delivering strong investment results for its clients and a strong reputation as a trusted and reliable investment manager, BlackRock has been able to attract new clients and expand its market share during times of market uncertainty. The company’s continued growth in ETFs, its broad-based product line, and its acquisition of Aperio to offer customization options make it a compelling investment option. Despite the risks associated with macroeconomic and interest rate, BlackRock’s strong risk management practices and its ability to adjust its portfolios in response to changes in the market make it a reliable investment choice.
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