BlackRock Has Gotten Bigger, but Not Necessarily Better

It's no secret that BlackRock BLK has grown by leaps and bounds in recent years. That growth has been fueled in part by increased demand for its asset-management and risk-management expertise, particularly in the wake of 2008's market meltdown. Yet most of the firm's expansion has come through acquisitions, notably through its 2006 deal to acquire Merrill Lynch Investment Management and its 2009 purchase of Barclays Global Investors. Those deals have made it the largest publicly traded asset manager in the world, with roughly $3.4 trillion under management as 2009 ended.

Mergers and acquisitions in asset management frequently lead to disappointing results for investors, thanks to cultural differences among organizations, operational challenges, personnel turnover, or a combination of those and other unforeseen factors. Given BlackRock's recent growth spurt and the challenges that may lie ahead, there's no guarantee that it will consistently or uniformly produce better results for mutual fund investors.

Points in BlackRock's Favor
There are several factors that increase the likelihood of investors' success. BlackRock executives are seasoned business builders and have proved thoughtful in their approach to acquisitions. They typically move quickly and decisively, which can ease the friction of combining varying investment organizations under one roof. They've also maintained a high degree of control at the corporate level, which sharply reduces the chance of the wholesale shifts in investment policy or attempted makeovers that caused many other asset-management firms to stumble over the years. In addition, BlackRock remains almost exclusively an asset manager. That last point sets BlackRock apart from some other large firms in which an asset-management operation may be forced to compete with a company's other business units (such as broker/dealer operations, record keeping, proprietary trading, or investment banking) for time, support, or resources.

Furthermore, BlackRock has shown a consistent ability and willingness to invest heavily in its investment personnel and risk-management resources. All BlackRock portfolio managers globally use the firm's formidable BlackRock Solutions portfolio-monitoring and risk-management technology platform. This common system eases some of the technological and operational challenges of its acquisitions. For instance, the former MLIM managers who came onboard in 2006 now use BRS to monitor their portfolios, and BGI was a BRS client for years before 2009's transaction. BlackRock also boasts a deep team of risk-management personnel with an independent reporting structure, which reinforces the firm's established philosophy regarding risk and risk management. Those resources are no panacea, but they help support the various teams that have become part of BlackRock over the years, and they help establish an environment conducive to consistent, repeatable investment success.

BlackRock also continues to take steps to improve the stability and quality of its portfolio management teams. In some cases, that has meant leaving well enough alone, as it did with its current municipal-bond team and the crew backing BlackRock Global Allocation MDLOX. Both of them joined BlackRock via MLIM, though during that integration process the firm did winnow down the legacy BlackRock municipal team. BlackRock also stuck with the team backing BlackRock Energy & Resources SSGRX, which came into the fold through the 2005 acquisition of State Street Research and Management.

In other cases, BlackRock has consolidated or made management changes at less impressive funds, including BlackRock Fundamental Growth MDFGX and BlackRock Aurora SSRAX. The firm also has hired new talent to reinforce its research capabilities, as it did in early 2009 when it acquired the hedge fund R3 Capital Partners, which rounded out its expertise in nongovernment mortgage-backed securities and high-yield debt. Helix Financial Group, a 2010 acquisition, has augmented its mortgage research efforts. In combination, such efforts represent BlackRock's ongoing commitment to strengthen areas of its asset-management operation.PAGEBREAK