Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fed chairman Ben Bernanke's legacy will no doubt include his characterization of the impending financial doom facing the U.S. economy in the notorious fiscal cliff. The term conjures up terrifying images, and is responsible for the preference of many investors and corporate executives' to keep capital sidelined, at least in recent months. It makes one long for the days of Greenspan's 'irrational exuberance,' although arguably that is part of the reason for the state of the economy today.
On Wednesday, President Obama hosted a group of 12 chief executives to discuss the topic that is on every employee, investor, and U.S. citizen's minds -- the looming fiscal cliff. The meeting isn't anything new, as CEOs often get an audience with the President. It's the timing of this particular gathering that makes it so important, with the future of the nation's economy -- including to an extent employment levels, as companies have been holding back on hiring until there is more clarity on the tax structure -- seemingly hanging in the balance.
The financial sector lacked representation there, as they were not asked to be part of the round table discussion, something that was pointed out by CNBC. The autos, retailers, and technology sectors, among others, were represented. Nonetheless, investment firms continue to do what they do best -- discover ways to make investors' money and return value to their shareholders.
Eye On the Prize
BlackRock (NYSE: BLK) president Robert Kapito gave a presentation at a Bank of America Merrill Lynch conference on the very day that the President was conjugating with CEOs. As the largest asset manager in the world, with some $3.67 trillion in assets under management, this firm is keeping its eye on the prize. Kapito spoke about the company's opportunity to grow market share and reward investors.
Indeed, BlackRock has had quite a ride, bolstering its share buyback program (the firm has repurchased 8.2 million shares so far this year), recently raising its quarterly cash dividend to $1.50 per share, earning a spot in the S&P 500 Index (that happened in 2011), and launching a new exchange-traded-fund (ETF) series. Shares have climbed 2.8% year-to-date, the stock has a price-to-earnings ratio of just under 15 based on trailing earnings, and the company strives for a dividend payout ratio of up to 50%.
One of the key growth areas for BlackRock is in ETFs. The asset manager's ETF business, dubbed iShares, coupled with its retail investment business, represents 33% of total AUM. Those same groups account for 66% of the firm's revenues, however. Indeed, ETFs are a "significant growth area" for BlackRock, as Kapito explained.
The growth potential is being exacerbated by an investment community that -- according to Kapito -- is demanding a mix of both active and passive investment management, the latter category of which ETFs are generally grouped under. These preferences come as a result of the fact that active managers, who charge higher fees in comparison with ETFs, have had a tough go of it lately and have not been able to outperform benchmarks in many instances.
The growth opportunity in ETFs is also being perpetuated by a shift in the retirement community away from defined benefit pensions toward defined contribution plans, such as 401(k) plans. The shift finds many plan sponsors in need of support to navigate the markets using new plan structures, and BlackRock is making a push to capitalize on this need in the retirement community.
That's not to say that BlackRock has not had its share of challenges. Much of the firm's assets are exposed to equities, which have been uncontrollably volatile in recent years. As a result of what Kapito calls "performance challenges," the firm had to replace talent in four of its five U.S. fundamental equity groups.
Alternative Managers Step Up
BlackRock only invests about 10% of AUM into non-traditional asset classes, unlike asset managers such as The Carlyle Group (NASDAQ: CG), which is a private equity investor. Although the fiscal cliff looms, Carlyle is doing its part -- despite the uncertainty surrounding its own tax rate -- to support the U.S. economy. According to a recent article in Bloomberg, the firm is raising a $1 billion fund designed to provide lending financing to mid-sized companies. Industry cousin Kohlberg Kravis Roberts (NYSE: KKR) is similarly one of several private equity firms that are raising as much as $4 billion to extend senior loans to the same demographic.
These firms are looking more like banks every day, and are filling the gap for medium-sized companies unable to obtain financing via traditional means. In doing so, private equity firms like Carlyle and KKR are positioning themselves to deliver generous returns of 10% or more to investors prior to fees, the article suggests. Meanwhile, they are widening their income stream, which only adds the compelling nature of these investments.
Propping Up Business
Hopefully, a fiscal cliff will be averted. Matthew Tuttle, chief investment officer at wealth management firm Tuttle Tactical Management, is confident that policymakers will reach some agreement, according to The Wall Street Journal. Meanwhile, asset managers with plenty of cash on hand are filling in the gap to prop up what portion of U.S. businesses they can.
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