An ETF Giant Gets Bigger
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Credit Suisse (NYSE: CS) recently announced that it has sold its exchange traded fund (ETF) business to BlackRock (NYSE: BLK). While not a big transaction, it is an important one for both companies. It's a sign of weakness for Credit Suisse and a sign of strength for BlackRock.
Credit Suisse managed to come through the 2007 to 2009 recession in better shape than many of its peers. A conservative culture was an important aspect of this. However, Europe has been mired in a weak economy that appears to be near or in a region-wide recession at present. This, coupled with increasingly stringent banking regulations, has left Credit Suisse in a less than desirable financial position.
To be sure, there's little risk the company is going to go out of business and financial troubles don't seem probable, either. That said, it needs to shore its finances up to better take on the industry's changes. Part of this was the sale of its ETF business to BlackRock.
Exchange traded funds are hot right now, so selling this division is a sign of the company's straights. It needs money and had to sell off a unit that might have had notable growth potential if retained. Clearly, dealing with the new banking laws is going to require hard choices at the bank. More such choices are likely to come.
Another headwind is what appears to be the Swiss government's relaxation of privacy laws. Credit Suisse's massive private banking division was built around the country's privacy, should there be material changes to the law, Credit Suisse is likely to find it harder to compete. Investors should probably stay on the sidelines here for now.
BlackRock, on the other hand, has made an important strategic purchase. It isn't large, but it continues to expand the company's reach in a hot market. In fact, after the purchase, which will add nearly $20 billion in assets under management, BlackRock will likely hold a nearly 50% market share of the ETF market in Europe. It is already the largest ETF player in North America after its 2009 purchase of iShares from Barclays (NYSE: BCS).
Joe Linhares, Head of iShares EMEA at BlackRock, commented in a press release, “The transaction significantly extends BlackRock’s footprint in Switzerland, which is home to one of the deepest investor bases in Europe.” Although the deal isn't huge, it is strategically important for BlackRock. It also continues the company's expansion at the expense of cash strapped European banks.
Like Credit Suisse, Barclays was forced to sell its ETF business, the well regarded iShares brand, to help shore up its recession hit finances. Still not quite out of the woods and with material operations in a weak region, investors should probably avoid Barclays, too. BlackRock's opportunistic purchases, on the other hand, look very compelling.
Since most ETFs are index based, they can be very profitable, despite low management fees. The real name of the game is assets under management. Costs are largely fixed, so increasing assets can materially increase profitability. BlackRock's ETF business was already huge and now its even larger.
Moreover, with a large institutional client base, the company's assets under management aren't as prone to the vagaries of market sentiment as the money managed by a company focused on individual investors. As the world's largest asset manager, BlackRock has a notable leg up on its competition.
A Great Company
BlackRock is a well-run company and would be a good option for investors seeking exposure to the asset management business. That said, its shares have had a notable run, from a low of around $165 in mid-2012 to recent highs nearing $220. This could be concerning to some investors, and rightly so.
However, with markets still in a state of flux and a broad product portfolio spanning all asset classes and management styles (including active versus passive), BlackRock remains well positioned for just about any situation, except, perhaps, a massive market selloff. That said, there are few asset managers that are well positioned for such an event.
A near 3% dividend yield and continued business expansion should make BlackRock a solid option for most investors. The most important thing to note from the Credit Suisse deal is that BlackRock remains strong enough to take advantage of weaker prey in its pursuit of growth. Which means more deals are likely at this industry giant.
ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!