Brookfield Asset Management (BN 0.64%) is a giant Canadian asset manager. Blackrock (BLK 0.93%) is one of its biggest peers, located in the United States. That's about where the similarities end, however, because they take very different approaches when it comes to investing on behalf of their clients. Here are some key facts you need to consider before you consider buying Brookfield or Blackrock.
1. The size thing
When it comes to running money for other people, which is basically what Brookfield and Blackrock do, size makes a big difference. Simplifying things, it generally costs a set amount to hire investment professionals. Once a company has covered those costs, much of the rest of the money it collects from clients is profit. That's why assets under management (AUM) is such a key figure for asset management companies -- the larger the figure, the better. Blackrock has nearly $7 trillion in assets it oversees for clients. Brookfield has a bit over $500 billion.
The interesting thing here is that Brookfield is a big company in the asset management business. It's just that Blackrock is, well, gargantuan.
2. The approach
That said, there's a notable difference between how these two companies go about investing the money they collect. Roughly two-thirds of Blackrock's AUM are tied to index products. Notably, it owns the iShares exchange-traded fund (ETF) franchise. It does other things, but index funds are the big story with Blackrock.
This has been a great business, as investors have increasingly switched from active management to indexes. But there's one small problem: expense ratios. This is what an asset manager charges for its services. Index funds tend to have very low expense ratios. Worse still, there's been an industry-wide race to lower these fees in an effort to gain an edge with customers, putting downward pressure on profitability. Size and growth in assets help to offset this trend, but with some ETFs sporting expense ratios below 0.05%, there's only so much room for further cuts, and profit margins are already really tight at those levels. Moreover, if investors for some reason decide they want to pull money out of the company's ETFs en masse -- a recession and/or bear market, for example -- profit margins could get squeezed very quickly.
Brookfield has a very different approach. Most of its assets are in infrastructure (like real estate, pipelines, and renewable power, among other things), so it is basically a specialist. To be fair, it has been broadening out some, recently buying a well-known debt-focused peer (Oaktree). But while the ETFs and index products that Blackrock offers span the investment spectrum, Brookfield is largely sticking to the same area it has for more than 100 years. With this niche approach, Brookfield can generally charge higher fees.
But that's not the only difference here. While Blackrock has focused on offering customers funds like ETFs, Brookfield makes extensive use of master limited partnerships (MLP). Investors can take money out of an ETF any time they want; once an MLP share is sold, it doesn't go away unless the MLP buys it back. This is why Brookfield calls its collection of MLPs "permanent capital." It earns fees for running these investments no matter what's going on in the market. It also makes heavy use of closed-end funds. Closed-end funds operate in roughly the same way as the MLPs -- once a share is sold, it remains in existence until it is bought back by the closed-end fund. (Blackrock sells such funds as well, but it is a relatively small part of the business compared to its index products.)
Roughly 45% of Brookfield's AUM is in such products, providing a solid foundation for the company's top line. In this way, its business is likely to be more resilient to Wall Street's ups and downs than Blackrock's. Add in the fact that it can, generally speaking, charge more for its specialized services than Blackrock can for its index products, and that provides even more leeway on the top and bottom lines.
This overview is a bit of a simplification, but the general idea is what's important. Blackrock's low-cost products keep profit margins tight, and investors can pull assets out whenever they want. For a long time, money has been shifting into index products, and that's been a huge boon -- but Blackrock could have a problem on its hands if the direction of the money flow shifts. Brookfield has a large core of AUM earning generous fees that can't be pulled out.
3. A bit more rewarding for income investors
Blackrock has a 2.9% dividend yield. It has increased its dividend every year for a decade, and its annualized dividend increase over the past 10 years has been an impressive 14%. That compares very favorably to Brookfield's roughly 1.2% yield, eight years of increases, and annualized dividend growth rate over the past decade of around 7%. So Blackrock clearly has the edge here for income investors.
That said, the past decade has seen nothing but a bull market since leaving behind the deep 2007-2009 recession. While both Blackrock and Brookfield held their dividends through that downturn, Blackrock's business wasn't as tied to index products back then. So this time around, the story may not be the same if a downturn sours investors on the long-term benefits of indexing. Some market watchers are even suggesting that the massive shift into index funds is a sign of performance-chasing by investors, who will be quick to run for the hills when times get tough.
4. Stock performance
Interestingly, despite the swift growth in index product that has underpinned Blackrock's business, Wall Street has largely favored Brookfield's stock. Over the past 10 years, Blackrock's shares have gained around 90%, while Brookfield's stock has rocketed higher by 265%. As each of these asset managers would tell you, past performance is no indication of future returns. However, it is clear that investors have had a clear preference for Brookfield's stock.
That said, the price-to-earnings ratios for Blackrock and Brookfield are fairly close, coming in around 17 and 18, respectively. This is just a rough guide to valuation, but it suggests that Brookfield isn't overly expensive compared to Blackrock, despite the larger share price gains it has seen. But the differing yields and dividend growth rates hint at a key story: If you are looking for income, Blackrock is a better bet; If you are seeking a growth stock, you should probably favor Brookfield Asset Management.
5. A long time coming
At this point, dividend investors should have a clear favorite (Blackrock). And so should growth-focused investors (Brookfield). But don't forget where we are in the market cycle, with stock prices near record highs. That's been supported by the longest U.S. economic expansion in recent history, but there are signs of fatigue starting to show up, with a number of companies highlighting early signs of an economic slowdown. During the last recession, Blackrock and Brookfield each got cut in half (or more) before they started to recover.
Given that their businesses are so tied to the market, that type of drop is understandable. However, for conservative investors, what could be the tail end of a long upturn seems like a pretty tenuous time to buy either of these stocks. That remains true even though Blackrock has fallen 24% from the all-time highs it reached in 2018. Brookfield, for reference, is still very close to an all-time high.
Both of these asset managers are probably best left on your watch list today. It's also important to note that Blackrock's heavy focus on index products has yet to be tested by a sizable market downturn. They aren't bad companies, and at some point, they might be screaming bargains. But right now the risks look like they outweigh the potential rewards.