Uncertainty is all around us. The housing market in most U.S. states is declining; the stock market is down 500 points one week then up 350 points the next, and elevated commodities prices have investors wondering if they've peaked or are poised for further gains.
This uncertainty equals business for asset management firms like BlackRock (NYSE:BLK) that offer institutions and individuals a wide range of investment options and advisory services. Investors building a portfolio of companies who are strong in providing asset management services should not overlook the following.
Merrill Won't Sell
BlackRock has nearly $1.4 trillion in assets under management (AUM). For the first three months of the year revenue increased 29% to $1.3 billion over the same period a year ago. On a GAAP basis, BlackRock's operating margin was up 3% to 30%. These numbers help explain Merrill Lynch's (NYSE:MER) decision not to sell off its 49% stake in the investment advisory firm. Merrill recently sold off its Bloomberg business to help mitigate its exposure to credit related write downs.
Alternative Investments Growing
Notably, BlackRock's alternative investments business doubled in size to $73 billion from the previous year, making it the fastest growing segment of the firm. Part of the growth was attributable to BlackRock's acquisition of Quellos Group, a hedge fund of funds, last year. While alternative investments still represent less than 6% of BlackRock's total AUM, this business segment is likely to continue growing as more institutional investors are seeking out this non-correlated asset class. Having a diverse basket of investment options like alternative investments is key for BlackRock's future growth. (To learn about FoF investments, check out Fund Of Funds - High Society For The Little Guy.)
Asset Manager to Consider
BlackRock's stock recently recovered from a 20% decline in value. Investors looking for an asset manager at a better bargain price should consider Legg Mason (NYSE:LM). Trading near $40 per share, Legg Mason is below its current book value suggesting a discount to its fair market value.
Although Legg Mason's AUM fell less than 2% to $950 billion at the end of its fiscal year in March, revenue rose almost 7% to $4.6 billion. Legg Mason was able to increase revenues by generating additional fees from its fixed income business line Western Asset Management, its mutual fund provider Royce & Associates, and its funds of hedge funds management firm Permal Group. For investors with a low risk tolerance, be advised that Legg Mason has lost nearly 50% of its value since the beginning of 2008.
Final Thoughts
When the markets are on the rise, everyone offering advice appears to have the golden touch. It's the firms with the widest range of product offerings and services who will win earn the most fees and survive the present storm.
For more tips on navigating down markets, read Adapt To A Bear Market and Surviving Bear Country.