BlackRock is the largest asset manager in the world with the greatest ETF portfolio of any ETF provider. BlackRock's iShares ETF product portfolio has contributed to much of BlackRock's growth thanks to the rise in popularity of low-cost ETF investing. Investors have over 900 ETFs to choose from.
Despite being well-known for its ETF offerings, BlackRock is well-diversified, employing other strategies like indexing, active, retail, cash management, and advisory. The asset manager has its AUM spread across equity, fixed income, multi-asset, cash management, alternatives, and advisory.
BlackRock maintains a technological advantage over peers. Its Aladdin platform allows BlackRock to manage risk better than any other asset management firms. The product is also provided to customers and almost $22 trillion in assets have been managed on the platform by over 200 clients in 2020.
BlackRock's main risks lie in the asset manager's heavy ETF and equity AUM allocation. BlackRock mainly relies on the performance of public assets and continued inflows to drive growth. At its size, the latter may be more difficult going forward.
We believe BlackRock is still in the early innings of its success. It has cost advantages over peers and high margins. Additionally, ETF investing is expected to get much larger, and ESG investing is gaining ground. If no attractive investment opportunities exist, BlackRock will have tons of cash to return to shareholders.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
A Global Brand Attracts Global Assets
BlackRock's most obvious advantage is the sheer size of the asset manager. It has amassed over $10 trillion in AUM across diverse asset classes and strategies.
For context, BlackRock's AUM is essentially the same size as the hedge fund, private equity, and venture capital industries combined.
To get to this point, BlackRock seemed to get the major trends right. In other words, it was always first to emerging trends that eventually became the norm. We will focus our discussion below on how BlackRock reigns as king in the ETF business.
In 2006, BlackRock expanded its retail and international asset management presence with the purchase of Merrill Lynch Investment Management.
Later, in 2009, BlackRock acquired the Barclays Global Investors unit along with iShares, which has turned out to be the best investment BlackRock has ever made.
Since then, ETFs took the market by storm, and BlackRock was the best positioned ETF provider in the world to reap the benefits of this strong trend. BlackRock's iShares is now the largest ETF provider with over 900 ETF options and trillions in AUM.
BlackRock's ETF selections contain many niche offerings with enough volume to make them compelling to investors. While other competitors may also have niche offerings, they are usually offered with higher fees and experience much lower trading volumes versus iShares ETFs.
ETFs are expected to continue gaining ground on mutual funds and surpassing them in popularity sometime between 2025 and 2030. BlackRock will take the centre stage as this trend prevails throughout the decade.
ETFs Keep Gaining Market Share
The Technology Advantage
The secret to BlackRock's success in becoming the largest global asset manager was to play the game differently than its competitors. While competitors were focused on traditional fund and portfolio management, BlackRock invested heavily into technology (and continues to do so today).
The Aladdin - short for Asset, Liability and Debt and Derivative Instrument Network - is a proprietary risk and investment management platform. The Aladdin is the bedrock of BlackRock's success by being the platform behind every process since 1999.
The platform is flexible and dynamic, allowing the user to view risk at the company / fund level, and narrow down as deep as a single trade.
The platform is versatile. Users can map out their goals, portfolio management, trading, compliance, operations, and risk functions to make informed and efficient trading decisions.
For an individual investor, this may seem like a tool too fancy and too expensive to ever consider. That's true. However, when managing trillions of dollars, staying on top of all risks and managing them according to their severity is what sets one firm apart from others.
This is what BlackRock has. BlackRock can quickly visualize any aspect of its managed assets and pinpoint quickly where BlackRock is overexposed (or underexposed!) to certain risks. Such risks would include COVID or geopolitical events.
Capturing alpha requires one to think differently than the pack. When technology is able to do much of the heavy lifting for you, human emotions are removed and alpha-generating returns are captured.
Aladdin serves over 200 institutional clients while also being used internally by BlackRock. Almost $22 trillion of financial assets were managed by Aladdin in 2020, approximately 5% of the world's financial assets estimated in 2020. Global institutional investors trust Aladdin because of its unmatched scale and how it helped BlackRock climb to the top.
Asset-Light Asset Manager
BlackRock is an asset-light manager with significant scale and technology present in every process throughout the company.
As such, BlackRock is able to enjoy high and growing profit margins. The asset manager was able to achieve ~40% operating margins because of its ability to spread costs over massive asset management operations.
In fact, BlackRock sports technology-like profit margins, with operating margin close to those of Microsoft, arguably the best business in the world.
With this ability to generate a ton of cash, BlackRock can return substantial capital to investors while also continuing to invest in its brands in technology, ETFs (iShares), private markets, active investment platform, ESG (i.e., Environmental, Social, and Governance).
We believe BlackRock will continue to buy back tons of stock, continue raising its dividend yearly, and build on its brand reputation in the process.
Exchange Traded Funds (ETFs) still provide a massive opportunity moving forward. Global interest rates are still low (and real rates are even lower). More than ever, investors around the world have been pushed along the risk spectrum into "riskier" assets, like equities (i.e., stocks) and real estate, and away from "safer" assets like deposits and bonds. BlackRock's robust ETF product portfolio offers plenty of options across different themes, risk levels, and geographies. Investors can mix-and-match ETFs and their asset allocation through BlackRock in a way no other ETF provider has been able to foster thus far.
Blackrock can capitalize on ESG investing trends. As the world strives towards a more sustainable future, investment dollars will increasingly flow into the ESG theme. BlackRock is well positioned for this trend, having already integrated ESG insights and data into 100% of its active and advisory investment strategies, made 2,000 leading ESG metrics available in its Aladdin platform, and established a dedicated ESG research & insights team.
Scale advantages and product diversity grant BlackRock outsized inflows. BlackRock offers clients a vast array of low-cost products and investment solutions with global scale. With this, clients can be more agile in this ever-changing investment environment. Of course, the Aladdin platform also helps BlackRock and investors alike to manage risk unlike any other platform. These advantages are unmatched by other asset managers, crowning BlackRock the AUM leader today and in the foreseeable future.
BlackRock is undeniably a great asset manager and business as a whole. It led the revolution in ETF investing and holds a substantial portion of the world's wealth.
However, about half of BlackRock's AUM has been sitting in equity each year in the last decade.
Therefore, much of BlackRock's revenue is dependent on continued inflows to equity assets. If stock markets underperform over sustained periods of time, interest rates rise around the world, or the world faces geopolitical issues and macroeconomic headwinds, equity strategy inflows may decline and hurt BlackRock's ability to grow.
How Much Bigger?
Bouncing off the previous idea, BlackRock may still face challenges even if markets perform well.
The company already manages over $10 trillion in assets. The law of large numbers may catch up to BlackRock fairly soon, given the massive size of the company.
BlackRock's AUM can grow in one of three ways:
Net inflows (organic growth)
Acquisitions (inorganic growth)
Increase in market value of AUM
While #2 and #3 are viable growth levers, we prefer to see sustainable organic growth.
At $10 trillion of AUM, BlackRock would need to rake in $500 billion in new money each year.
At $20 trillion of AUM, that number would obviously grow to $1 trillion per year.
Although BlackRock has seen inflows above half a trillion in a year (2021), we are uncertain as to how long BlackRock will be able to keep up this organic growth rate.
Regulatory & Headline Risk
It is natural for a company of BlackRock's size to attract the eyes of regulators.
BlackRock owns a vast amount of the world's wealth, meaning it has the power to make market-moving decisions in many asset classes.
For example, BlackRock has been in the news in 2021 for buying up residential housing, mainly through Invitation Homes, an investment of BlackRock.
Fortunately for families, BlackRock owns a rather insignificant amount of US residential housing (~0.5%). However, this attracted the eyes of many and BlackRock faced scrutiny in the news for interfering in these markets.
We anticipate regulatory hurdles to rise as BlackRock swells bigger and gets involved in smaller markets around the world.