News and Events
A Look At Asset Management Firms Beyond Their Financial Ratios
Alen Lai (MBA '10)
On September 17, 2008, we had the great pleasure of having Barbara Novick, co-founder and vice chairman of the investment management firm BlackRock, Inc., to deliver a speech to us on campus. Ms. Novick's visit to Johnson came at an opportunistic time amid the financial crisis on Wall Street. The day before, Reserve Primary Fund, the oldest U.S. money market fund, "broke the buck". It was the first time in 14 years when a money market fund's net asset value fell below $1 a share.
Using the Reserve Primary Fund as an example, Ms. Novick reminded us the "dangerous approach" of seeking the highest yield without adequate considerations of risks. While asset management firms adopting such aggressive maneuvers may be able to improve their financial ratios in the short-run, their shareholders and customers are likely to suffer in the end. Additionally, Ms. Novick cited the mutual fund scandal earlier this decade as another example of value destruction for shareholders. In the scandal, mutual fund managers used illegal tactics such as marketing-timing and late-trading to benefit themselves at the expense of the funds' investors. While these illegal activities did not hurt the firms' financial ratios nor appeared in the firms' financial statements initially, they severely damaged the firms' reputation. As a result, shareholders and investors lost confidence and withdrew money from the firms.
Which asset management firms should shareholders have confidence in? They are the prudent asset managers who stay away from aggressive investments when the "premiums are not enough to offset the risks" embedded in the investments, said Ms. Novick. They are also the ones who have a "client-centric approach" as they promote transparency and always put their customers' interests in the first place. The best asset managers constantly generate new ideas to meet their customers' ever changing needs. In recent years, there has been an increased demand for low cost beta products such as ETFs and target date funds. Products that focus on emerging markets have also been popular. Firms that created these products to meet the new demand have fared much better than the ones who have not.
Ms. Novick also explained how the company she co-founded was able to grow its assets under management to $1.43 trillion since its inception in 1988. One of the key drivers has been BlackRock's strength in risk management. In fact, BlackRock's risk management is superior to the point where their competitors purchase risk management solutions directly from BlackRock. Another differentiator of BlackRock is its "One BlackRock" philosophy. With this framework, the firm strives to meet the needs of its customers by offering a wide variety of products and functional services. The firm's decision to establish a local presence through its investment centers around the globe also gives the firm a competitive advantage as it breaks down the language and time-zone barriers. Another key element of success at BlackRock is its mergers and acquisitions strategy. In addition to a targeted company's culture, BlackRock emphasizes even more on the company's core values. BlackRock will not pull the trigger unless it is convinced the core values of the two companies are similar. As a result, the acquisitions of State Street Research and Merrill Lynch Investment Managers have been seamless and extremely successful. Because of the attributes mentioned above, BlackRock has been the best performing publicly traded asset management companies in the past 5 years.
To identify a good asset management firm, investors need to look beyond the financial ratios. A firm's philosophy, risk management and how it treats its customers are often more important than its profits and losses.
Click here to access the full video of Ms. Novick's presentation.
