Thursday, 16 January 2014

Blackrock and the land of passive investment

Three months ago I posted on Blackrock (link here) and noted how the company's iShares / passive products were hugely outstripping any active offering the company has. 

The last quarter has continued that trend.  Just take a look at the equity inflows during Q4 below, iShares equity inflows were over 27 times those of the company's active products.  27 times!

Is this justified?  Well, look at the investment performance of actively managed equity products.  Over a one, three or five year period it is desperately 50-50 whether the product outperformed or not.  So no wonder the passive inflows are so huge?

Well...yes and no.  Passive has outperformed because of the nature of markets.  As I noted in this note on a stock picking market...we have been in that sort of world:

So...if we do move into that world, will Blackrock trading at around x14 EV/ebit today be as strong a performer?  In October I noted the shares technically had to push through US$300 to keep moving forward and they have.  Futures today are suggesting the stronger-than-hoped numbers will see the shares north of US$325.  I can't help thinking that the company's share price move is getting ever more correlated with not just the direction of the (equity) market but with a continuation of a NON stock picker's market. 


  1. Interesting point of view. As the probability of further PE expansion is rather small in a post 2013 world, stock prices will move mainly according to the micro reality of companies earnings. Add to that increased volatility linked to QE exit strategy and rising rates and you have the perfect backdrop for stock pickers. Now, will the investors used to low-cost ETFs massively move to more expensive active managers requiring a minimum of due diligence work? The trick for BlackRock can also be to continue to boost their offering in enhanced/smart beta ETFs (low-vol stocks, high dividend, ...). Nice analysis anyway, worth watching how things evolve.

    1. Thanks for reading and for the comment. Blackrock too have a good sized active equity business and, as you point out, the smart beta strategies too. What I note though is a fully/highly valued share and (undoubtedly) some potentially lazy extrapolation analysis by the sell-side. It could become a perfect storm if markets get volatile (clipping fee levels and inflows) and stock picker's start to outperform. We will see. I do respect though their distribution and deal-making capability: the iShares purchase was clearly legendary.