BlackRock, Inc. is a financial services firm that manages assets for both large institutional clients and private individual investors. In 2006, the company merged with
Merrill Lynch Investment Managers, nearly tripling the amount of money it manages (commonly called 'assets under management' or AUM) and diversifying the company's assets beyond its then-historical focus on
fixed income products such as bonds. The company makes most of its revenue (over 70% in 2006) from advisory fees for managing financial asset types such as fixed income, equity, real estate, and alternative products. At the end of 2007, BlackRock ranked fifth worldwide in terms of worldwide AUM, after
Barclays Global Investors,
State Street Global Advisors, Fidelity Investments, and The Vanguard Group (the last two are not publicly traded).
[1] As of December 31, 2007, BlackRock was managing about $1.36 trillion in total assets.
[2]
As an investment firm dependent on service fees, BlackRock's performance is linked closely with market volatility and its ability to react to changing conditions. Its significant bonds holdings are very sensitive to changing interest rates; its cash holdings, especially in foreign currency, are affected by the depreciation of the dollar; The diversity of the New BlackRock's portfolio has given some protection from fluctuations in general economic cycles. While its large equity holdings allow it participate strongly in bull markets, as seen by its strong Q4 2007 performance (90% increase in net income over the previous year), the company's reputation as a premier bond manager make it an ideal choice for investors seeking safer investments (bonds) during times of economic turbulence.
Approximately 33% of BlackRock is owned by PNC Bank (PNC).[3]
[edit] Company Overview
BlackRock offers a breadth of financial investment products, including fixed income, equities, cash management, and alternative investments. In addition to generic ones, BlackRock also offers branded products under the BlackRock Solutions name (e.g., investment system Aladdin and bond calculator AnSer). BlackRock's revenue comes primarily from advisory and administration fees for managing and advising assets for its clients; BlackRock also charges a profit fee for good performance.
Approximately 33% of BlackRock is owned by PNC Bank (PNC).[3]
[4]
[5]
BlackRock generated revenue in 2006 to the tune of $2.1 billion, of which $1.84 billion came from advisory and investment administration fees. This percentage composition has been constant between 85% and 90% of revenue for the last five years.[6] Compared to 2005, total revenue increased by 76.1%; advisory fees increased by 88% and administration fees increased by 44.2%, increasing total advisory and performance fees overall by 81%; however, most of this increase in fees revenue was driven by the MILM merger, which noticably increased the equity fees' fraction of revenue and decreased fixed income fees' contribution to revenue.[7]
The majority of BlackRock's AUM lies in fixed income, which before 2006 accounted for around 60%. The second largest portion is cash management, followed by equity and then alternative investment products (such as real estates and hedge funds). After BlackRock's merger with MLIM equity and cash composition increased over by over 900% and 150%, respectively. Nonetheless fixed income still comprises the largest part of BlackRock's AUM.[8]
[9]
[edit] Trends and Forces
- Significant interest rate exposure due to fixed income: While the 2006 merger with MILM decreased BlackRock's dependence on fixed income products (from over half to about about one-third of assets under management), the company still holds a significant amount of its assets in fixed income. Interest rates are the most important determinant in the pricing of bonds and other fixed income products, and therefore, changes in the fed funds rate may affect the company's revenues and overall earnings. In 2007, the Fed lowered the federal funds rates several times, and is expected to continue cutting rates in 2008, making BLK's bonds more valuable.
- Global economic development: As more countries around the world become more developed and living standards improve, global demand for the type of services that BlackRock provides increases. After merging with MLIM, the share of foreign-based assets that BlackRock managed was about one-third of its total AUM.[10] This international exposure introduces risks related to foreign regulations and exchange rates. [11]
- Integration risk with MILM: BlackRock's merger with MLIM more than doubled its AUM, which contributed to its 76.1% revenue increase from fiscal year 2005 to 2006.[12] However, expenses increased at an even higher rate (by 91.1%), much of which was due to the higher employee compensations and increased administrative expenses brought about by the merger with MLIM.
- Investing its own assets: In addition to maintaining its clients' assets, BlackRock invests $1.75 billion of its assets in equity, fixed income, and foreign currencies. BlackRock also has numerous investments in municipal securities, [CDO]s, [corporate bonds], and other fixed income securities. It estimates that a 1% change in interest rate could change the value of these investments by 10%. BlackRock's foreign investments also increased significantly after its merger with MLIM. This increase also increases its foreign exchange rate risk; a 10% change in exchange rates could change the value of these cash accounts by about $78 million. Other company assets that are affected by these market forces are its convertible bonds ($372.8 million. Since these bonds can be either bonds or stocks, they are vulnerable to both interest rate risk and equity price risk.[13]
[edit] Competition
BlackRock faces competition from other companies that offer investment management services to both retail and institutional clients, such as Barclays Global Investors, State Street (STT) , and Fidelity Investments (privately held). In terms of global AUM, BlackRock is fifth largest, coming after the aforementioned three and Vanguard Group, Inc. (privately held). Another close competitor is Legg Mason, whose growth in recent years and operating metrics are close to those of BlackRock's.
| Company Name
| 2006 AUM
| 2006 Revenue
| 2006 Operating Margin
| Notes
|
| BlackRock, Inc
| $1.3 trillion
| $2.1 billion
| 22.5% [14]
|
|
| Barclays Global Investors[15]
| $1.8 trillion[16]
| $43.4 billion
| 32.19%
| The revenue and net income figures are for Barclays PLC, of which BGI is a subsidiary. Conversion to USD from GBP was made using exchange rate as of 12/31/2006
|
| State Street Global Advisors
| $1.749 trillion [17]
| $6.311 billion [18]
| 35% [19]
| The revenue and pre-tax margin figures are for State Street Corporation, of which State Street Global Advisors is a subsidiary. The pre-tax margin is also for State Street's Investment Management division, the closest approximation of SSgA.
|
| Fidelity Investments
| $1.64 trillion [20]
| $12.9 billion [21]
| N/A
| No numbers on profit margin were given. 2006 profit levels, according to the Reuters article, was $1.18 billion.
|
| Vanguard Group
| $1.17 trillion [22]
| N/A
| N/A
| No information about Vanguard's revenue or net income was found.
|
| Legg Mason [23]
| $0.96 trillion [24]
| $2.6 billion
| 27.0%
| The AUM is as of 12/31/2006, but Legg Mason's Annual Report cites the revenue and net income figures as of 3/1/2006. The reported profit margin is also the post-tax margin. Post-tax margin is 16.6%
|
[edit] References
- ↑ Pensions & Investments Online, Top 250 firms ranked by worldwide assets as of 12/31/06
- ↑ http://www.businesswire.com/portal/site/home/index.jsp?epi_menuItemID=887566059a3aedb6efaaa9e27a808a0c&ndmViewId=news_view&ndmConfigId=1000614&newsId=20080117005257&newsLang=en.htm
- ↑ 3.0 3.1 PNC Bank 10-K Pg. 35
- ↑ Data from BlackRock, Inc's 2006 10-k, page 23
- ↑ Data from BlackRock, Inc's 2006 10-k, page 32
- ↑ BlackRock, Inc 2006 10-k, page 23
- ↑ BlackRock, Inc 2006 10-k, page 26
- ↑ BlackRock, Inc 2006 10-k, page 26
- ↑ Data from BlackRock, Inc 2006 10-k, page 24
- ↑ BlackRock, Inc 2006 10-k, page 1
- ↑ BlackRock, Inc 2006 10-k, page 10
- ↑ BlackRock, Inc 2006 10-k, page 32
- ↑ BlackRock, Inc 2006 10-k, pages 54-56
- ↑ BlackRock, Inc. 2006 10-k, page 27
- ↑ Revenue and operating margin taken from 2006 annual report, page 162
- ↑ Barclays 2006 Annual Report, page 2
- ↑ State Street Corporation 2006 10-k, page 28
- ↑ State Street Corporation 2006 10-k, page 67
- ↑ State Street Corporation 2006 10-k, page 107
- ↑ Pensions & Investments Online, Top 250 firms ranked by worldwide assets as of 12/31/06
- ↑ http://www.reuters.com/article/bankingfinancial-SP/idUSN1617607820070216
- ↑ Pensions & Investments Online, Top 250 firms ranked by worldwide assets as of 12/31/06
- ↑ Revenue and margin data from Legg Mason 2006 Annual Report, page 35
- ↑ Pensions & Investments Online, Top 250 firms ranked by worldwide assets as of 12/31/06
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