BlackRock’s earnings come in a little short of expectations, but the ETF market that they dominate is still red hot. The company is also seeing a real potential for further market gains.
It is earnings season again, and when we are looking at the earnings of the world’s largest fund company, or money manager of any type, there may be more to learn here than just how the company is doing.
When you manage $6 trillion in assets like BlackRock does, this does provide the opportunity for a unique perspective on things, especially when it comes to what we might expect going forward with the broader stock market.
ETFs have exploded in popularity over the last few years, even though they only offer index funds. Index funds themselves have really grown, and while they are still behind actively managed funds, it won’t be long before index funds become king.
85% of all the new money invested in funds goes to index funds, and this trend us increasing. Their share of the market therefore increases each year, and as more of the old-fashioned active mutual fund investors cash in, if things remain the same, we’ll eventually see them reduced to a small percentage of the market.
ETFs appeal to those who have access to a computer, and while there are still plenty of investors who do not access the internet, this number has really shrunk. There are even people in their 90’s that have a tablet or smart phone, and while computers have intimidated a lot of people, even the elderly are looking to participate in today’s digital society and with mobile phones in particular.
Among index funds, ETFs are gaining a bigger and bigger share, and are poised to pass mutual funds one day as more and more investors become familiar with their advantages. If you invest in an index ETF, chances are it will be with one of BlackRock’s many ETF funds, as they are the major player.
The EFT Market Is Expanding and Tightening
BlackRock is looking to further expand their reach by moving more into illiquid assets, further expanding the range of products and assets that you can buy shares in. There is also a movement afoot to offer actively managed ETF funds, and offer the same advantages of instant trade executions and lower management costs to those who prefer this type of fund.
When you are charging fees to manage as much money as BlackRock does, you do stand to gain a lot, and BlackRock makes a good amount of money indeed. Their profits for last quarter were $1.02 billion, which is down from the $1.05 billion in the same quarter last year, but still not that far off.
Earnings also declined, dropping from $6.68 in the same quarter a year ago to $6.61 last quarter. This is not a very big difference, but is an interesting one given that BlackRock’s business has expanded and their funds under management just hit another all-time high, being the first company ever to crack the $6 trillion mark.
They did beat the expectations of analysts by a very good margin, with the consensus looking for just $6.04 a share, which means that the decline in earnings year-over-year was nowhere near as big as was expected.
CEO Lawrence Fink explained that this decline was reflective of the increased competitiveness in the industry. Index funds are unique in every way other than with their management fees, and ETF investors are among those who pay a lot of attention to this. This has served to tighten up the market as the firms see who can offer the best deal.
BlackRock did not get to be number one for no reason though, and have well-established advantages. The increased focus on fees is going to have an impact on their bottom line, but this one is almost meaningless.
BlackRock Sees Room for the Bull Market to Grow
Perhaps the most interesting thing that came out of this earnings call is Fink sharing with us what he is seeing from investors.
It’s common knowledge that we have been seeing a notable outflow of funds from investors with the stock market, which would have served to put the market down a fair bit this year, if not for the fact that companies are providing an inflow of their own which has simply been bigger.
Stock buy-backs have been at very high levels, but this is the time of year companies do this more, and therefore the current level of inflows from this is not sustainable. If investors continue to take more money out of the market than they take in, at the rate they have been doing it lately, as the buy-backs slow down, this would be bearish for the markets.
Once the bear starts to show its face again, this tendency to sell gains momentum, and then we go down until the market declines enough so that enough inflow is created through buying on value to overcome the level of outflow.
Fink told us he believes that this trend will reverse and he is viewing all the money that investors have taken out of the market or not put in and are holding in cash, and believes that this can drive the market quite a bit further up when put to work again.
As of April 3, net outflows from investors in 2019 added up to $19.7 billion. The following week produced a net inflow of $4.3 billion, and while this still leaves us down for the year by $16.4 billion, it’s a start.
Even though this only represents one good week, it is still notable since it does indicate a change of heart, and with everything remaining equal, this would likely represent a trend reversal.
Perhaps investors weren’t so impressed by the current rally this year, and may have thought that we may start on our way down again, especially with all the calls for a bull market being close or imminent, that they took the advice to cash in now.
This is a great example of how investor sentiment works, and this is why we don’t just see stock prices just tracking business performance. It only affects things to the degree that it influences sentiment, and this sentiment is driven by a number of other things as well, like fearing a bear market, a real bear market, looking to not be greedy and take their profits, now, moving portions of their portfolio to less risky asset classes as they move toward retirement, cashing in during retirement, their getting out to cut their losses, and so on.
As the months have passed, with things still going up and looking solid, this may indicate that investors have now been more comfortable with this new bull and perhaps have even been impressed at how the market has continued to move up in spite of all the things that tried to stand in the way of this.
If this change can gather momentum, and even if it at least doesn’t result in more outflows, this will allow the bull market to continue for as long as this is maintained. Investor sentiment trends like stocks do, and they usually trend in the same direction, with few exceptions.
The current situation in 2019 is an exception though, and companies have worked hard and spent a lot of money to prod stock prices higher. Investors have held them back quite a bit, but with both on the same side, we may soon be waving goodbye to this current rut we’re in and well pass the highs we’ve just been able to poke through so far.