Rob Rutschow, Lead Analyst at CLSA Americas, says the trend toward passive investing is having an impact in the asset management space, and for firms like BlackRock, Inc. (NYSE:BLK) that have large ETF businesses, this has led to growth.
Our view is that BlackRock is unique among the investment managers, given that nearly one-third of their revenue and perhaps more of earnings come from ETFs. That’s the highest growth segment within asset management. The asset managers tend to be high-beta, meaning that when markets go down, the asset managers will go down more, but that when markets go up, they tend to go up more.
There are few areas in finance services that have really good organic growth prospects. ETFs are one of the areas. There are projections that ETF assets globally could double over the next five years. If that was to occur, then BlackRock might see half of their earnings coming from the ETF business. Ultimately ETFs could match or exceed the size of the mutual fund business, given the tax advantage they enjoy.
We feel that Blackrock has a good business mix, and if anything, we would like to see them have more ETF exposure. But given that they have about one-third of the market share they are in a pretty optimal position.
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