BlackRock's Kapito Sees Inflows Topping $200 Billion a Year as ETFs Gain

Date: Friday, April 23, 2010
Author: Bloomberg

BlackRock Inc. may average more than $200 billion in annual investor deposits over the next five years after the acquisition of Barclays Global Investors added passive funds, said Robert Kapito, the firm’s president.

Net new business at the world’s largest money manager, which oversees $3.35 trillion, may grow at a rate of 5 percent to 6 percent, Kapito said in an interview from his New York office. The numbers don’t include market appreciation.

“We have the largest distribution force in the asset- management business so I think we certainly can do that,” said Kapito, 52. “We expect to see growth in the passive and the iShares business -- those two are getting a lion’s share of the money -- and the alternatives business,” said Kapito, who along with Chief Executive Officer Laurence D. Fink is a co-founder of New York-based BlackRock.

BlackRock, started in 1988 as a fixed-income manager, on Dec. 1 completed its acquisition of Barclays Plc’s fund unit to become the largest investment firm. The $15.2 billion purchase, the biggest to combine an active manager with one that oversees passive investments, enabled BlackRock to add the iShares exchange-traded funds and other index-tracking products that are gaining popularity with investors.

BlackRock, which is scheduled to report first-quarter earnings before the market opens on April 26, told analysts that clients had agreed to invest $38 billion in its funds this year as of Jan. 21. Had BlackRock owned BGI for all of 2009, the inflow for the combined company would have been $144.1 billion, regulatory filings show. Industry flows slowed last year after the stock-market plunge.

Profit May Triple

“The ETF and passive business should drive a lot of flows, and alternatives are in recovery mode,” Jeffrey Hopson, an analyst with Stifel Nicolaus & Co. in St. Louis, said in an interview. Hopson, who rates the shares “buy,” expects BlackRock to reap about $200 billion a year in net deposits.

BlackRock is likely to report quarterly profit that more than tripled from a year earlier, based on the average estimate of 10 analysts surveyed by Bloomberg. BlackRock will earn $2.46 per share, excluding certain items, compared with 81 cents in the year-earlier period, according to the average estimate.

Investors are too optimistic about profit contributed by BlackRock’s acquisition of BGI, according to William Katz, an analyst at New York-based Citigroup Inc. who issued Wall Street’s first “sell” rating on the company April 1. Plowing back savings from the BGI merger into growth initiatives may crimp the company’s bottom line this year and lead to disappointment among investors who have ratcheted up their earnings expectations, Katz said.

Kapito said the firm’s ETFs and hedge-fund products are benefiting from investor appetite for a “barbell” strategy that entails putting a portion of money into passive investments that mimic indexes and part of it into funds designed to generate “alpha,” or higher returns than market benchmarks.

IShares ETFs

Exchange-traded fund assets in the U.S. surged 67 percent to $750 billion in the year ended in February, according to data from the Investment Company Institute in Washington, as investors sought low-cost alternatives to active funds. Mutual funds in the U.S. held $10.97 trillion as of February, according to the ICI.

BlackRock’s iShares unit is the largest seller of ETFs, with $509 billion in assets as of March 31. Alternative strategies such as hedge funds account for $102 billion.

After expanding its equity business with the 2006 purchase of Merrill Lynch & Co.’s money-management unit, BlackRock has about 45 percent of its assets, or $1.5 trillion, in stock funds. BlackRock’s stock funds alone hold as much in assets as Boston-based Fidelity Investments, which managed $1.5 trillion as of Dec. 31. BlackRock has about a third in bonds, placing it ahead of rival Pacific Investment Management Co.

Executive Departures

The BGI acquisition hasn’t prompted significant client defections at BlackRock, Kapito said. BlackRock’s customer- retention rate across the firm has been about 99 percent, he said.

Some executives have left BlackRock since the acquisition. Kristi Mitchem, a former managing director in BlackRock’s retirement unit, departed last month to join State Street Corp. Scott Amero, the former co-head of BlackRock’s fixed-income unit, stepped down earlier this year to spend more time with his family.

“There is always a group of people that decide that this is an opportunity to reflect on their lives, if they want to go forward in a new organization or not,” Kapito said. Some executives also left after they got an opportunity to cash out equity stakes in the company, Kapito said.