The Asia-Pacific region has been the weak link in BlackRock (BLK) Inc. (BLK)'s global growth story in recent years, leading some market veterans to conclude the New York-based giant has yet to find a formula for success there.
In a Feb. 10 interview, Mark McCombe, BlackRock's Asia-Pacific chairman, conceded the company faced some serious headwinds when he took the helm two years ago in Hong Kong.
But, he said, progress in restructuring BlackRock's business since then has left the firm poised to grow strongly, even if that's not yet obvious from the numbers for the region found in BlackRock's financial reports.
Those numbers — for net flows, assets under management and revenue — offer little evidence that the world's biggest money manager, with $4.3 trillion in assets under management at the end of 2013, has been gaining traction in the region.
For 2012 and 2013, BlackRock reported combined net outflows of $75 billion from Asia-Pacific clients, even as the firm was enjoying inflows of more than $140 billion from clients in the Americas and more than $50 billion from clients in Europe, the Middle East and Africa.
(That tally included the loss of a single passive, $74 billion fixed-income mandate in Japan, which BlackRock Chairman and CEO Laurence D. Fink noted in an earnings call for the third quarter of 2012, was offering such low fees that it no longer made business sense for the firm to manage. Even without that loss, however, Asia-Pacific flows would have been largely flat at a time when investors in other major regions were throwing money at the firm — a pattern that prevailed in 2010 and 2011 as well.)
At the end of 2013, Asia-Pacific clients accounted for 8% of BlackRock's total assets under management, or less than $340 billion, down from more than 10% at the close of 2011 and 2010.
Region's contribution drifting
On the revenue front, meanwhile, the firm's annual reports and quarterly financial statements show the region's contribution to total revenues — which are tallied on the basis of where the investment vehicle is based, rather than where the investor is located — drifting toward the low end of a 4.5% to 6% range over the past four years.
Mr. McCombe said the “snapshots” of BlackRock (BLK)'s Asia-Pacific AUM and flow numbers in the firm's financial reports mask significant changes made “to shift the business around from its traditional focuses” to a sustainable growth path. Areas that needed attention two years ago included:
- bolstering BlackRock's “human capital,” which Mr. McCombe called a key to turning around the firm's business in the region;
- diversifying BlackRock's product lines from areas that were either experiencing “serious margin pressure,” such as institutional indexing in Japan, or falling out of favor, such as the mining and resource funds that had been dominating BlackRock's retail business in the region; and
- better integrating BlackRock's mix of legacy businesses and newly acquired ones to make the firm more client focused and client friendly.
On the personnel front, Mr. McCombe said BlackRock has made tremendous progress throughout the Asia-Pacific region.
He cited Australia, where the leadership team has been “completely overhauled,” as an example of where that progress is already paying dividends in terms of improved investment performance and new business wins.
Aussie bounce-back in 2013
After suffering net outflows for much of the five years through 2012, BlackRock (BLK)'s business in Australia bounced back in 2013, with some of the strongest institutional flows the company enjoyed from any region or country last year, Mr. McCombe noted. A spokesman said BlackRock doesn't provide country-specific flow numbers.
Other top level appointments promise a longer-term payoff, such as BlackRock's January 2013 hiring of Goldman Sachs veteran Wang Hsueh-Ming as chairman, China — where government policy and regulatory reforms are determining the future of the huge Chinese market, said Mr. McCombe.
Mr. McCombe called the Feb. 10 appointment of former CLSA head of Asia-Pacific, Andrew Reynolds, to the new position of chief financial officer and head of corporate strategy for BlackRock's entire Asia-Pacific business, “the culmination” of the top level reorganization he's pursued over the past two years.
He said Mr. Reynolds will effectively serve as his “right hand” in executing BlackRock's strategic initiatives, resolving a management gap that resulted from a finance function for the region that had been too “segmented” from strategy. When the person running the firm's finances is also running the execution of strategy, the odds improve of getting “the allocation of resources to the right places,” Mr. McCombe said.
Focus on quality, not quantity
Touching on steps taken to remedy BlackRock (BLK)'s overexposure in some markets to low-margin products, Mr. McCombe noted that one of the first decisions he made as Asia-Pacific chairman, in consultation with BlackRock's board and management, was “to focus on quality, not quantity.”
A case in point: the company's business in Japan. BlackRock had succeeded in building a very large book of indexed assets for pension funds at “very, very low fees,” in a market where local trust banks have proven willing to manage those assets for next to nothing. Chasing AUM, without regard to the sustainability of BlackRock's business there, is “not something I'm willing to do,” Mr. McCombe said.
A BlackRock spokesman declined to specify how much the firm manages for Japanese clients. Market veterans speculate that, with the loss of that $74 billion mandate in 2012, Japan's share of BlackRock's Asia-Pacific AUM has fallen to less than 50% from almost two-thirds.
AUM growth isn't a focus, “because, really, we can get one good retail flow and it can knock the lights out of a big institutional mandate at very low basis points,” said Mr. McCombe.
On that score, while the headwinds BlackRock faces in Japan managing passive institutional mandates might persist for a while, Mr. McCombe said a countervailing tailwind could come from the firm's exclusive deal with Mizuho Bank to be an engine of that Tokyo-based heavyweight's business relating to the Nippon Individual Savings Account initiative Japan's government launched in January to promote private retirement savings.
NISA is just getting off the ground, but the potential is there for millions of Mizuho clients to be making tax-advantaged investments of roughly $10,000 a year. “When you get that up and running, and into full asset-gathering mode,” it could be the kind of building block BlackRock is looking to put in place for “long-term and sustainable growth” in the region, said Mr. McCombe.
For the past year or so, the successes BlackRock has had in diversifying its business in Japan, Australia and the rest of the region have been a matter of replacing “assets that were leaving with new and higher-quality assets,” said Mr. McCombe, “with a lot of flows recently into U.S. high-yield bonds, European equities and the beginning of signs of flows into our Asian product set.”
Meanwhile, the region's 8% of AUM figure — while an accurate measure of how much money BlackRock manages on behalf of Asia-Pacific-based clients — doesn't reveal where those clients are investing that money, which ultimately determines which region can claim the bulk of the resulting revenue, Mr. McCombe noted.
In that regard, the fact that clients in Australia allocate a big chunk of their investments to global products managed in the U.S. or Europe — while clients based in the U.S. or other developed markets continue to invest a considerable portion of their assets in the U.S. market — skews those revenue figures in favor of BlackRock's U.S. business, he noted.
Brighter picture ahead
If the current story told by BlackRock (BLK)'s data for the region looks mixed, Mr. McCombe said there's reason to expect a brighter picture over the coming year. “I'm delighted with the Australian turnaround. Our Asia ex-Japan retail business has had a fantastic year” — overcoming the outflows from BlackRock's mining and resource funds — “and I feel great about 2014,” he said. Meanwhile, iShares. BlackRock's exchange-traded funds business, had an exceptional year across the region as well, he added. A BlackRock spokesman said net inflows for the firm's Asia ex-Japan retail business in 2013 were up 63% from 2012, although he wouldn't give specifics. iShares saw net inflows of more than $6 billion for the latest year, mostly from institutional investors in the region. That was largely on par with net inflows for 2012, and up from $2.4 billion in 2011. With the headwinds BlackRock was facing looking set to recede further, the region will become a stronger contributor to the firm's bottom line in coming years, predicted Mr. McCombe. “I'm pretty comfortable that, for the next three years, we should be delivering double-digit (revenue) growth,” he said.
This article originally appeared in the February 17, 2014 print issue as, "BlackRock aims to find right formula for Asia-Pacific".