In a previous article we saw that the U.S. Capital Market sector is mature, competitive and subject to intense competition. This sector consists of 10,000 companies with annual revenue of $15 billion and assets under management (AUM) in excess of $13 trillion. While barriers to entry are low, it is difficult for competitors to build the scale and intangible assets necessary to compete in this business. So let's take a look at two companies in this sector and see which one is doing better and thus stands as the best investment.
Building Brand and Reputation
Legg Mason Inc. (LM, Financial) is another player in the industry with $656 billion of AUM at September 2013. The company operates out of offices in the U.S., the UK and a number of other countries worldwide. As of September 2013, fixed income assets represented nearly 54% of total assets under management, equity assets 26% and liquidity assets 20%.
Opportunistic Acquisitions
The company has an acquisition-driven strategy and in that order acquired London-based fund-of-hedge-funds firm Fauchier Partners Management from BNP Paribas Investment Partners, an asset management unit of BNP Paribas. Fauchier had $5.4 billion in assets and will be combined with Permal in what is called the “Group,” a focused platform with $24 billion in AUM. This will strengthen the Permal employee talent pool as well as other additional benefits like broader research resources and better technology. Legg Mason is interested in acquiring asset managers to merge with the company’s existing network of subsidiaries and generate longer-term efficiency improvements.
Inspiring Confidence
Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividend and share repurchases. In April 2013, the company raised its quarterly dividend by 18%. Leg Mason has raised its dividend each year since 2010. Over the last year, the company bought back shares worth $436.8 billion.
Too Big to Fear
BlackRock Inc. (BLK, Financial) is a leader in the investment management, risk management and advisory services business with AUM of $4.1 trillion at the end of third quarter 2013 and clients in more than 100 countries. Equity accounted for 52% of AUM followed by Fixed-Income with 30%. BlackRock´s long-term strategy is supported by: 1) the growth that may occur outside the U.S. and 2) the growth of the ETF industry.
Business Outside the U.S.
The company realigns its international retail business along regional lines with a focus in the EMEA (Europe, the Middle East and Africa) region which manages approximately $1 trillion (a quarter of total AUM) and represents tremendous growth opportunities to expand the business in search of HNWI (high net worth individuals) and UHNWI (ultra-high net worth individuals).
A Passively Managed Financial Instrument
Although the U.S. ETF Market is small relative to the mutual fund industry, financial institutions will likely uses ETFs in place of single securities gaining liquidity and managerial benefits. Nowadays, the ETFs in the U.S. have never been more popular because they reduce volatility while managing risk, gives exposures via emerging markets, commodities and other nontraditional categories. These reasons made BlackRock’s purchase of iShares in 2009 and maintain a high portion of market share in the market until the present days. The unit offers 600 ETFs and has more than $750 billion invested in markets worldwide.
In terms of valuation, the next table shows two of the most used multiples:
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
While BlackRock ROE of 9.7% is above the industry mean of 6.4%, Legg Mason's negative ROE is simply alarming. It is very important to understand this metric before investing in a high-growing company.
Final Comment
Although the capital markets industry has seen dramatic changes since the financial crisis in 2008, mainly because investors’ confidence has been crushed, AUMs are above their $13 billion 2007 pre-crisis peak. Expansion in new markets, the growing ETF market and successful strategic divestitures in recent times seem to be the key components of the companies’ growth strategy. For a long-term perspective, both companies are a buy, but I would advise fundamental investors to consider adding BlackRock to their portfolios, as it seems to be a more attractive option for the longer term.
Hedge fund gurus like Ray Dalio, Joel Greenblatt, Jeremy Grantham and Steven Cohen added BlackRock´s stock to their portfolios. Should you too?
Disclosure: Damian Illia holds no position in any stocks mentioned.
Building Brand and Reputation
Legg Mason Inc. (LM, Financial) is another player in the industry with $656 billion of AUM at September 2013. The company operates out of offices in the U.S., the UK and a number of other countries worldwide. As of September 2013, fixed income assets represented nearly 54% of total assets under management, equity assets 26% and liquidity assets 20%.
Opportunistic Acquisitions
The company has an acquisition-driven strategy and in that order acquired London-based fund-of-hedge-funds firm Fauchier Partners Management from BNP Paribas Investment Partners, an asset management unit of BNP Paribas. Fauchier had $5.4 billion in assets and will be combined with Permal in what is called the “Group,” a focused platform with $24 billion in AUM. This will strengthen the Permal employee talent pool as well as other additional benefits like broader research resources and better technology. Legg Mason is interested in acquiring asset managers to merge with the company’s existing network of subsidiaries and generate longer-term efficiency improvements.
Inspiring Confidence
Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividend and share repurchases. In April 2013, the company raised its quarterly dividend by 18%. Leg Mason has raised its dividend each year since 2010. Over the last year, the company bought back shares worth $436.8 billion.
Too Big to Fear
BlackRock Inc. (BLK, Financial) is a leader in the investment management, risk management and advisory services business with AUM of $4.1 trillion at the end of third quarter 2013 and clients in more than 100 countries. Equity accounted for 52% of AUM followed by Fixed-Income with 30%. BlackRock´s long-term strategy is supported by: 1) the growth that may occur outside the U.S. and 2) the growth of the ETF industry.
Business Outside the U.S.
The company realigns its international retail business along regional lines with a focus in the EMEA (Europe, the Middle East and Africa) region which manages approximately $1 trillion (a quarter of total AUM) and represents tremendous growth opportunities to expand the business in search of HNWI (high net worth individuals) and UHNWI (ultra-high net worth individuals).
A Passively Managed Financial Instrument
Although the U.S. ETF Market is small relative to the mutual fund industry, financial institutions will likely uses ETFs in place of single securities gaining liquidity and managerial benefits. Nowadays, the ETFs in the U.S. have never been more popular because they reduce volatility while managing risk, gives exposures via emerging markets, commodities and other nontraditional categories. These reasons made BlackRock’s purchase of iShares in 2009 and maintain a high portion of market share in the market until the present days. The unit offers 600 ETFs and has more than $750 billion invested in markets worldwide.
In terms of valuation, the next table shows two of the most used multiples:
| Company | Trailing P/E | Compared to Industry P/E Mean (=13.4) | Forward P/E |
| Legg Mason | ---- | Premium | 14.74 |
| BlackRock | 18.9 | Premium | 16.91 |
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
| Company | ROE | Compared to Industry Mean (=6.4) |
| Legg Mason | -7.3 | Below |
| BlackRock | 9.7 | Above |
While BlackRock ROE of 9.7% is above the industry mean of 6.4%, Legg Mason's negative ROE is simply alarming. It is very important to understand this metric before investing in a high-growing company.
Final Comment
Although the capital markets industry has seen dramatic changes since the financial crisis in 2008, mainly because investors’ confidence has been crushed, AUMs are above their $13 billion 2007 pre-crisis peak. Expansion in new markets, the growing ETF market and successful strategic divestitures in recent times seem to be the key components of the companies’ growth strategy. For a long-term perspective, both companies are a buy, but I would advise fundamental investors to consider adding BlackRock to their portfolios, as it seems to be a more attractive option for the longer term.
Hedge fund gurus like Ray Dalio, Joel Greenblatt, Jeremy Grantham and Steven Cohen added BlackRock´s stock to their portfolios. Should you too?
Disclosure: Damian Illia holds no position in any stocks mentioned.
