Independent money managers are the Rodney Dangerfields of the investment world. Sometimes, we just can’t get any respect.
In meeting potential clients, I am often told that what I do is easy. (How I wish it were.) Everyone watches CNBC, BNN and reads investment blogs, so everyone feels they’re a market expert, rattling off price-earnings ratios, book values and other conventional metrics of stock performance.
On one occasion a prospect insisted that he could replicate my overall results by investing in exchange-traded funds that passively track market indexes. That’s when I decided it was time to get even. Rather than argue about the merits of active management, why not demonstrate it by finding a way to profit from investors’ ETF obsession?
So I went and purchased shares in BlackRock Inc. Self-styled experts are pouring billions of dollars into ETFs and index funds. Why shouldn’t my clients benefit?
BlackRock, for the uninitiated, is the market king of ETFs and index funds. It manages $3.8-trillion (U.S.) in assets, invested in a myriad of exchange-traded funds, mutual funds and other investment strategies.
The company’s iShares unit offers 600 ETFs and has more than $750-billion invested in markets worldwide, giving it more than 40 per cent of the global ETF market.
And that’s not all. The company caters to both retail customers and institutional investors, and it has a risk-management business, Aladdin, which provides risk advice on another $10-trillion of assets. If you have a view on an emerging economy, stock market, government bond, corporate bond, or commodity, BlackRock has an ETF or an investment strategy for you.
Despite the company’s commanding position in a hot sector, it trades for only about 17 times forward earnings, not much more than the overall stock market. To my way of thinking, BlackRock investors are paying a market-average multiple for a significantly better-than-market business.
BlackRock now generates $10-billion in annual revenue from management of financial assets. Its operating margin is an impressive 40 per cent-plus.
As with all financial services firms, its costs are more or less fixed. As its assets grow, it fees also grow but net income grows disproportionally faster due to operating leverage. For the quarter ended June, 2013, revenue grew approximately 10 per cent, while earnings per share increased more than 33 per cent. Not too shabby!
As with any companies, there are always negatives, most notably the intense competition that BlackRock faces in the asset management and ETF sectors from large banks and independents. To mitigate some of this competitive challenge, BlackRock has partnered with Fidelity, gaining access to some 10 million potential new clients for ETF and index products.
Competitors may carve a few percentage points of market share away from BlackRock, but that doesn’t affect my fundamental investing thesis.
My view is that when retail or certain advisers put money to work in equity, bond or commodity markets, they will frequently choose an index or an ETF product to do so. When they do, there’s a very good chance they’ll chose a BlackRock product. If so, my clients will benefit.
Gabriel Lowenberg is president and CEO of Lowenberg Investment Counsel Inc. (LICi), an independent wealth investment management firm based in Ottawa, which owns the securities discussed here for the benefit of its clients. The views and opinion expressed in this article are those of Mr. Lowenberg alone and do not constitute investment advice.