BlackRock Shakeup Unsurprising
The wide-moat asset manager's experiment with its active equity platform may produce more consistent levels of investment performance and organic growth over time.
We were not too surprised to see wide-moat-rated
While the decision to move $30 billion of the $275 billion in assets under management the company had invested in active equity strategies at the end of 2016 into more quantitative strategies will lead to the loss of $30 million in annual revenue, that's out of an expected $12 billion-$14 billion in annual revenue the next several years. If we assume the firm loses half of the $30 billion in AUM it is migrating as investors seek out other active options outside BlackRock, the annual impact would be $70 million-$80 million.
There is very little here to alter our long-term view of the firm, as we never put much confidence in a turnaround of the active equity business (with fee compression and outflows being the forecast trajectory longer term), so we are leaving our $410 fair value estimate in place.
BlackRock's decision to move 11% of its active equity platform, which accounted for 5% of total AUM and 16% of firmwide revenue last year, looks to be a grand experiment aimed at overcoming the stigma of poor relative investment performance and higher fees that has put its active equity operations (as well as those of most of the rest of the industry) at a disadvantage to low-cost index funds and exchange-traded funds.
Given that these operations generate the highest fees in BlackRock's portfolio and have struggled with performance and flows since the 2008-09 financial crisis, and seeing the impact that the growth of passive investing has had on the ability of active managers to outperform (especially in a rising market), we think this is an experiment worth pursuing--especially if it produces more consistent levels of investment performance and organic growth, albeit at lower fees than traditional active investing has generated for BlackRock in the past.
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