BlackRock starts to flex retail muscles

Five years ago, Frank Porcelli would get laughed out of the room when he pitched Merrill Lynch Investment Managers funds to competing wirehouses.

“It was an impossible sell,” said Mr. Porcelli, who was chief operating officer for MLIM Americas. “The idea of having the bull logo on your prospectus just wasn’t attractive.”

Since BlackRock Inc. bought MLIM in 2006, Mr. Porcelli has seen his job get a lot easier. In five years, the firm has placed 240 products on broker-dealer platforms.

The funds’ market penetration at broker-dealers other than Bank of America Merrill Lynch has jumped to 5%, from less than 1%. Since the market low of 2008, BlackRock has seen its retail actively managed fund assets rise to $300 billion, from $185 billion.

And now the $3 trillion firm, long a leader in the institutional market, wants to double the size of its retail business (excluding exchange-traded funds) by 2014, primarily by targeting registered investment advisers, wirehouses and independent broker-dealers.

To do this, the firm is ramping up its wholesaler force, hiring a team of trainers for them, adding new products such as alternatives and launching customized wrap programs for retail advisers.

Ultimately, BlackRock thinks that its size will get it to where it wants to be, because advisory firms are looking to do business with fewer partners and the company can provide services across the board.

“The breadth of what we do, and the global scope and ability to go from alternatives to mutual funds to ETFs and back, makes us a very important partner,” said Mr. Porcelli, managing director and head of BlackRock’s U.S. retail business.

But though BlackRock may be a leader in the institutional arena, some wonder if the firm has the performance to catch advisers’ eyes.

Just 30.4% of BlackRock’s equity funds and 15.7% of its fixed-income funds have been in the top performance quartile over the past five years, according to Morningstar Inc.

Because of its institutional bent, BlackRock traditionally has managed its portfolios in the way those clients want — to match the returns of their stated benchmarks, said Geoff Bobroff, president of Bobroff Consulting Inc.

“Institutional clients want what they expect from returns,” he said. “Advisers want oversized returns.”

And BlackRock’s tendency to stick to its benchmarks has hurt its funds’ performance, said Kevin McDevitt, an analyst at Morningstar. “When you manage funds that way, it’s hard to shoot the lights out,” he said.

BlackRock recognizes its deficiencies. In October, the firm hired Chris Leavy, the former chief investment officer of equities at OppenheimerFunds Inc., as its chief investment officer for fundamental equities in the United States, a new position.

He said that he is evaluating BlackRock’s equity funds and working to ensure that the firm retains portfolio management teams that have shown superior performance, as well as bring in new teams in areas where the firm has no investment expertise.

So far, the firm has added researchers to its large-cap-growth and large-cap-value research teams, Mr. Leavy said.

“Where we already have the performance, we need to make sure we are telling that story, and where we don’t have that, we want to get it right in the long term, as opposed to having a knee-jerk reaction,” he said.

And BlackRock does have many strong-performing funds, Mr. Leavy said.

“We have four- or five-star funds in seven of Morningstar’s largest categories,” Mr. Leavy said. “Some retail fund firms would kill for that.”

TOTAL RETURN

Sixty-two percent of BlackRock’s assets were in four- and five-star funds as of the end of last year, according to Morningstar.

BlackRock also has many funds that aim at total return rather than trying to beat benchmarks. And the firm hopes to expand that lineup in coming months, Mr. Porcelli said.

For example, the firm’s top-selling $50.3 billion Global Allocation Fund Ticker:(MDLOX) returned 8.77% for the past 10 years and has been in the top quartile for its category for the past three-, five- and 10-year periods, according to Morningstar.

BlackRock already has one thing that retail advisers are after: the $619 billion iShares ETF lineup, which it bought in 2009. And the firm is looking to expand its alternatives product line in response to adviser demand.

“People know BlackRock for being U.S.-based, institutional and fixed income, but that’s such a small part of our business right now,” Mr. Porcelli said.

Twenty-nine percent of the firm’s retail business is in fixed-income assets, while 47% is in equities.

And BlackRock executives think that because of its diverse product line and geographic scale, it is in a strong position to gain market share in the growing retail-advice market.

The average wirehouse has $1.5 trillion in client assets under management, Mr. Porcelli said.

“About $500 billion of that is professionally managed in managed accounts or funds, but the other trillion is in individual stocks and bonds,” he said. “Advisers want to move those assets into professionally managed accounts.”

To help advisory firms do this, BlackRock is launching a retail wrap program that will be customized to advisers’ needs.

Over the next few months, the firm will hire an eight-person team dedicated to talking to advisers about the kind of wrap programs they want and then developing those programs.

BlackRock has already customized managed-money portfolios for some adviser firms that have approached it, Mr. Porcelli said.

For example, the firm has developed an ETF wrap program for LPL Financial, he said.

But BlackRock won’t limit its offerings to large broker-dealers.

“The independents don’t have the benefit of having their own economist or their own independent portfolio-outsourcing guy to put together diversified ETF products,” Mr. Porcelli said. “We can do that.”

That doesn’t mean that BlackRock is going to develop a customized wrap program for each individual adviser, Mr. Porcelli said.

“We will find out what the issues are, and create solutions around them,” he said.

To support its retail efforts, BlackRock plans to hire 20 external and 20 internal wholesalers over the next 18 months, adding to its 182-member wholesaler team. Over the next year, the firm will hire a three-person training team to assess the skills of its wholesalers and work to develop them so they serve advisers’ needs, Mr. Porcelli said.

BlackRock measures its wholesalers’ success by gross sales, which average $450 million in annual gross sales per wholesaler. The firm’s 2014 target is $800 million in gross sales per wholesaler, Mr. Porcelli said.

Although BlackRock’s goals are lofty, many observers think that it has a good chance of meeting them.

“Their image is stellar,” said Neil Bathon, founder of Fuse Research. “It’s a good time for them to try.”

E-mail Jessica Toonkel at [email protected].

Related Topics: BlackRock Inc.