BlackRock stakes reputation on its growing girth

Size may not be everything, but increasingly the scale and breadth of the investment solutions a money manager can bring to the table will be the key to success in the industry, BlackRock Inc. Chairman and CEO Laurence D. Fink predicted.

Of course, Mr. Fink has a dog in that fight. BlackRock — an active bond and equity giant — announced June 17 that it would acquire index and ETF behemoth Barclays Global Investors. That deal is set to spawn an industry colossus with more than $2.7 trillion in client assets, roughly twice the size of the next biggest money manager.

Speaking July 21 on BlackRock's second-quarter earnings call, Mr. Fink argued that the quantum leap in scale the creation of “BlackRock Global Investors” will achieve is perfectly timed to meet growing demand from institutional investors for strategic partners with multiasset-class investment and risk management capabilities to oversee their portfolios.

Fears that money managers can become too big to be nimble are giving way to an appreciation for firms that can offer a comprehensive, coordinated suite of investment capabilities, Mr. Fink said.

By way of example, he noted that one institutional client — who put BlackRock "in the penalty box" when it acquired Merrill Lynch Investment Managers in 2005 — awarded his firm an additional mandate of $800 million following BlackRock's announcement that it would acquire BGI, and its $1.5 trillion in assets, for $13.5 billion.

BlackRock spokesman Brian Beades declined to identify the client.

The BlackRock model “is clearly working,” with much of the $46 billion in commitments BlackRock has in its pipeline now made up of large, multiasset-class “comprehensive relationships,” Mr. Fink said.

Industry veterans say there's reason to believe industry trends will favor managers capable of serving as a one-stop supermarket for investors.

With a growing number of institutional investors struggling to do more in the way of portfolio oversight with shrinking staff, logic would dictate that funds will be looking to hire fewer managers with broader capabilities, said Dev Clifford, a consultant with Greenwich Associates, a Stamford, Conn.-based consultant to money managers.

Still, while Greenwich's surveys consistently show institutional investors talking about trimming their manager lineups, the trend in recent years has shown a modest increase instead, Mr. Clifford noted. For example, Greenwich's latest survey for 2008 showed large corporate plans with more than $5 billion in assets averaging 8.7 domestic equity managers, up from 8.3 managers in 2007 and 8 managers in 2006. Likewise, those big corporate funds averaged 5.7 domestic bond managers in 2008, up from 5.1 managers for 2007 and 4.9 managers for 2006. Large public funds, meanwhile, averaged 5.5 domestic bond managers in 2008, up from 5.1 managers for the prior two years, he said.

Ronald P. O'Hanley, president and CEO of New York-based BNY Mellon Asset Management, which with $926 billion in client assets as of June 30 is no shrinking violet, agreed that broad “go-anywhere” mandates are gaining ground fast.

More than “scale,” however, a “broad scope of skills” that goes beyond pure investment product skills is what will allow managers to tap into that trend, said Mr. O'Hanley.

Allan Martin, a partner and senior consultant with investment consulting firm NEPC LLC based in Redwood, Calif., said globe-spanning, multiasset-class money managers should increasingly have competitive opportunities, but success in managing those complex organizations will determine whether they can take advantage of them. History shows more failures than successes in that regard, he said.

A consultant to money managers, who declined to be named, said the formula BlackRock has used — successfully — to absorb Boston-based State Street Research & Management Co. and MLIM during the past five years, which was basically “rolling up a lower quality firm into a higher quality firm,” can't be applied to a “merger of equals.” And while BlackRock's last few acquisitions have been skillfully handled, at some point “large corporate issues can get in the way of alpha production,” the consultant said.

During BlackRock's earnings call, Mr. Fink said after meeting with BlackRock and BGI's large institutional clients in the past month, he could say with “99% certainty” that “our clients are very excited about the combination.”

Mr. Fink added that a month into planning the integration, the addition of BGI's index and ETF capabilities to BlackRock's suite of active strategies appears poised to create “opportunities even more thrilling than when we announced the deal.”

“Pundits talk about … how scale is bad. I think they're going to be proven wrong,” he said.

One institutional client of both BlackRock and BGI with more than $4 billion in assets, who declined to be named, is apparently contributing to that 1% of uncertainty. In a telephone interview, the client said opinion among institutional investors he's spoken with who, like him, use both managers, is sharply divided.

While some see the coming merger as a non-event, others fear a clash of cultures that could have dire consequences and a third pool is taking a wait-and-see stance, the institutional investor said.

One predictor of success or failure will be the number of senior BGI executives and managers who leave the organization in the months after the deal is completed, sometime around the last quarter of 2009 and the first quarter of 2010, observers say.