Financials Take Center Stage

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Mid-October has produced some industry shifts that will remain with the financial sector for years to come.
Just days after reporting better than expected earnings and helping to lift the entire broader markets, which incidentally had been pulling back in recent sessions, Citigroup (NYSE: C) has announced that Vikram Pandit is stepping down as CEO and a member of the board of directors all at once. Michael Corbat, Citi's former CEO of Citi's Europe, Middle East and Africa business, has been voted in as the new CEO by the company's board. Time will tell what Citi's culture under Corbat will look like but according to CNBC the Salomon Brothers alum has garnered positive reviews.

Pandit, for his part, said he could not be leaving the company in better hands, although there is confusion surrounding the circumstances surrounding his abrupt departure. Another senior member, John Havens, President and COO, is also resigning from his post. Citi hasn't rocked the markets like this since buying and later spinning off Travelers Group, or perhaps since the financial crisis when the bank's shares were trading near $1 per share.

Analysts such as Dick Bove of Rochdale Securities insist that now is a time to pile on Citi shares, according to CNBC. With Corbat at the helm, Bove says that Citi shareholders can anticipate more of an international push in addition to dividends and stock buybacks under Corbat.

Citi's shakeup is emblematic of some deeper shifts -- changes that extend beyond the big banks and into the asset management arena -- that are unfolding in the financial sector of late.

Earlier this week, BlackRock (NYSE: BLK),  the world's largest money management firm with some $3.5 trillion in assets under management, revealed that third-quarter profits soared nearly 8%. The asset management firm, which invests across such vehicles as hedge funds and private equity portfolios in addition to its mega-ETF business, restructured its ETF fee structure to better compete with the likes of Vanguard, says Barron's. Lower fees, however, were not originally in the cards. On BlackRock's earnings conference call, CEO Larry Fink went so far as to call the market's rock-bottom fee structure started by the firm's rivals "stupid," according to The Wall Street Journal.

BlackRock announced a realignment that, in addition to slashing fees, extends to the addition of new exchange traded funds (ETFs) and -- something that is especially intriguing given the alternative asset management industry's push-and-pull dynamic with marketing -- will launch a mainstream advertising campaign targeting the retail investor. It won't be long before institutional asset management has worked its way into the family dinner-time chatter.

Recent changes in the financial group illustrate a paradigm shift in the asset management community. It's not every day that you see a alternative investment firm running commercials during the Superbowl.

Blackrock is unveiling its iShares Core Series, which is a family of 10 ETFs designed for long-term investors seeking diversification, "competitive pricing," and "tax efficiency," all according to Blackrock. As part of that diversification strategy, the Core ETFs will invest in domestic equities, international equities and fixed income.

The asset manager-behemoth's brand initiative includes marketing across all media spectrums including television, digital and print sources. That marketing blitz will evolve into a worldwide effort beginning in 2013.

BlackRock shares rose modestly on news of its new ETFs and brand-awareness push, but as the investment firm makes its way more into the mainstream there may be more upside potential.

The publicly-traded nature of BlackRock, and more recently private equity firm The Carlyle Group (NASDAQ: CG), has given retail investors a chance to share in the profits that were once reserved for institutions, such as pension funds. BlackRock's ETF push brings these investments to the forefront, and helps to shine the spotlight on some of its industry peers, like Carlyle, which oversees some $156 billion in assets under management.

Carlyle has delivered an internal rate of return of 31% annually over the past quarter-decade, according to co-founder and chief executive David Rubenstein speaking at a recent Baron Capital Investment conference in New York. The stock has increased almost 20% since the IPO in May.

Carlyle is in the private equity business. It takes credit for the corporate turnaround of companies like Hertz and Dunkin Donuts. Unlike Citi, Carlyle isn't likely to have any change at the helm any time soon. At 63 years old, Rubenstein noted that he felt more like 22 and that alluded to the fact that retirement is light years away.

The biggest mistake that Rubenstein can recall is not investing early in Facebook when he had a chance. Rubenstein reminised about when his Harvard-educated daughter's now husband once urged him to provide the financial backing to Mark Zuckerberg, which Rubenstein declined to do and instead watched from the sidelines as the company grew into a multi-billion dollar pay-day.

For his part, Rubenstein sees the role that private equity plays in society as increasing. Carlyle does participate in carried interest, which allows it to earn 20% of clients' profits with generous tax benefits. Carried interest has become a political football although Rubenstein doesn't expect any potential forthcoming changes in public policy to interrupt the company's track record for returns.

Mid-October 2012 was a memorable week for the big banks and asset management firms. Citi's executive shakeup will once again impact the firm's culture and is likely to require some time of adjustment for employees and shareholders. BlackRock's marketing initiative could benefit asset management stocks as the company shines the spotlight on alternative firms while its decision to compete more fiercely on price underscores its scale.

 

 


GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc. Motley Fool newsletter services recommend BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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