It is said that a high tide raises all boats, however higher average markets can also raise all asset levels. Asset managers for a fee manage client assets in various products including mutual funds, exchange traded funds (ETFs), traditional brokerage accounts, and money market products. While the general objective of these firms is to create the best product (which usually means managing the highest returning mutual fund or brokerage accounts that appreciate each year), it is generally the direction of the broader market which is more impactful for these firms rather than any great, new product that their employees create.
Most client asset levels at capital market related firms are billed on daily average levels, which means that firm’s generate new revenues when their employees bring in new assets or the broader markets revalue their existing client assets higher or lower. Taking the most recent year in the stock market and using industry leading asset manager BlackRock (BLK) as an example, demonstrates the power of market appreciation versus new business won by employees. 2012, as seen below, was a good year for investors with consistent quarterly appreciation for the S&P 500 stock index. The S&P 500 appreciated 10.1% in the first quarter of 2012 from the fourth quarter of 2011. The index then continued its advance gaining marginally in the second quarter, up 0.1% from the first quarter, which then lead to a sharp move higher in the third quarter, with the S&P up 3.8%. The market then finished the year with a solid 1.2% gain in the final quarter of 2012.
Now looking at the impact of what the market did to BlackRock’s existing client assets versus the new business won by BLK employees, displays the importance on the broader environment. In 1Q of 2012, BlackRock clients withdrew $25 billion in assets (usually for a variety of reasons including underperformance or rebalancing asset allocations). However in the same quarter, with the market up 10.1%, BlackRock experienced appreciation of existing client assets of over $200 billion. This means BLK struck new revenues on over $200 billion in assets. With the market continuing to trend higher throughout the rest of the year, BLK’s final tally for market appreciation for 2012 finished at $321 billion (as highlighted by the yellow box below) versus new client assets deposited of just $3 billion (green box below).
BlackRock is not the only firm in finance that prospers when markets grow. This phenomenon happens within the asset management division at Goldman Sachs (GS) for example, and at other core asset managers including Legg Mason (LM).