Amid increasing regulations and uncertain future earnings, it's tough to get excited about investing in the financial-services sector. Main Street is still very angry at Wall Street, and in the heart of election season, that's never a good thing for our large banking and financial institutions. However, while many banks face increased regulation and uncertainty, one financial-industry behemoth has found a way to profit. I'm talking about BlackRock (NYSE: BLK), the largest asset manager in the world.
The one-stop asset-management shop
BlackRock has distinguished itself from its peers by doing exactly one thing: managing money. In the asset management world, most investors are familiar with managers with a focus on traditional mutual funds, like T. Rowe Price (Nasdaq: TROW), Legg Mason (NYSE: LM), Fidelity Investments, and Franklin Resources (NYSE: BEN).
While BlackRock also operates in this space, this asset manager has focused much of its growth in the booming exchange-traded fund (ETF) industry. With the company's purchase of Barclays (NYSE: BCS) Global Investors, better known to ETF investors as iShares, BlackRock now has more than $3.1 trillion under management. That's more than double the size of its next largest competitor, State Street (NYSE: STT).
Eating away at the 401(k)
BlackRock's acquisition of iShares has helped the company make a push into the traditional mutual fund manager's bread and butter, the 401(k). These retirement plans are a $2.7 trillion industry that has traditionally consisted of allocations from the mutual fund industry. In fact, mutual funds make up about $2 trillion of this market. It is estimated that about $2 billion worth of iShares funds are allocated to 401(k) plans, and BlackRock is pushing to grow that number substantially.
While traditional mutual funds have their own benefits and a long track record, these funds simply cannot compete on a cost basis with the ETF industry. Mutual funds have an average expense ratio of more than 1.5%, while iShares ETFs' average expense ratio is less than 0.45%. This significant percentage adds up over time in a 401(k) plan.
Another growing unit
BlackRock took some heat in 2008 because its close work with the U.S. government allowed the company to benefit from the financial crisis. The company's BlackRock Solutions unit works with institutions to shore up balance sheets, find distressed assets, and dispose of them as appropriate. One of BlackRock's most important clients during the financial crisis was the federal government, which was flooded with toxic assets it had been forced to take on from troubled institutions such as AIG (NYSE: AIG), Bear Stearns, and Lehman Brothers. As a result, the BlackRock Solutions unit saw its revenue more than double from the previous year.
The unit struggled to keep up the pace in 2009 as the crisis abated, expanding only at a 10% rate, but at a conference this week, CEO Larry Fink assured investors that this unit is primed for strong growth in the future. "We have never had more inquiry in our solutions base than today," Fink said. "We are probably in need of -- hiring another 50 people if we could find the people right now." The interest in BlackRock's services should continue as financial institutions work to fix their balance sheets to comply with the recently passed Basel III guidelines.
The Foolish bottom line
With the uncertainty that new rules and regulations have placed on the financial industry, as well as the volatility that global equity markets continue to encounter, BlackRock is in the sweet spot of the sector. The ETF industry continues to grow as investors seek low-cost ways to gain exposure to a broad basket of stocks, bonds, or commodities, and BlackRock is the leader in this space. In addition, BlackRock's Solutions team has created a niche of its own, one which other savvy institutions will continue to seek out in hopes of improving their own bottom lines.
In a financial sector with a lot of question marks, you can be certain that BlackRock's prospects for continued growth look pretty good.
Let us know what you think about BlackRock and the growth of ETFs in the comments box below.
