Let me introduce you to the World of AUM. It’s a world that exists only in the Financial Sector, and unless you happen to be employed in that particular part of reality, you’ll likely find what I’m about to tell you is more than a little strange.
AUM is an acronym for Assets Under Management, and today we will hear from 5 of the most significant residents of this very exclusive World. In order of significance, those five institutions are State Street Bank, Citigroup, Wells Fargo Bank, JP Morgan Chase, and Blackrock, Incorporated.
The metric we’re using to measure these financial institutions is Assets Under Management. Of prominent AUM Members, only the Bank of America needs to be added to this group. They consistently report their earnings a day after the rest; for some reason, that’s been lost to time.
You’ll notice that four AUM members are commercial banks: State Street, Citigroup, Wells Fargo, and JP Morgan Chase. The odd man out is Blackrock, technically a money manager, not a bank at all. And therein lies much of the distinction. Blackrock has one primary function, to manage various portfolios within the constraints of their respective portfolios. It can perform ancillary services, such as check writing and debit cards, but at its heart and soul, it is simply a portfolio manager.
That’s in no way to diminish the scope and reach of this premier member of the World of AUM. When it comes to assets they manage, no one matches them. At the year-end of 2021, Blackrock had gathered $10 Trillion under its roof, and although the Pandemic knocked that number down, they still hold more than $9 Trillion, a tidy sum by anyone’s calculation.
So when Blackrock CEO Larry Fink or any of the Portfolio Managers at Blackrock call up a company they invest in, they will get that Company’s President’s undivided attention. And that realization has many, both on and off Wall Street, more than a little concerned. Briefly put: Blackrock has influence. $9 Trillion worth of influence that they’re not afraid to exercise.
It is leading to a fascinating situation for Blackrock. Of all the AUM members, Blackrock has the poorest reputation among investors. Increasingly many are becoming wary of Black Rock’s public stance on Hot Button Social Issues. Blackrock is one of the most prominent proponents of strict environmental constraints among those companies it invests in. It is also a significant advocate for the policy known as Environmental, Social, and Corporate Governance, or ESG. It’s a program of social advocacy that is revolutionary within the American Free Enterprise system and has more than a few traditional Free Market Capitalists concerned.
On the other side of the World of AUM are the commercial banks. The difference between the money manager, Blackrock, and the commercial banks is stark. While Blackrock manages twice the assets as any of the Banks, even the largest of the Banks, JP Morgan, has less than half the assets under management than Blackrock. But Blackrock operates under razor-thin margins. Their total operating margin is far less than 1%.
On the other hand, the banks would likely turn up their nose at that kind of income. Banks make profits six ways from Sunday and have their customers coming and going. For years, Banks have focused on fee income, a steady stream of cash that seemingly never goes away. The list of Bank Fees is endless, and you probably know them better than I do. But there are checking fees, credit card fees, loan fees, inactive account fees, and so on.
Fees give banks a sense of security, the realization that no matter what, the Bank will generate income. It’s why JP Morgan Chase is worth four times more than Blackrock. Ultimately, it’s not just Assets Under Management. It’s also income. And JP Morgan blows Blackrock away in revenue.
Today, each member of the World of AUM will present their quarterly results. The final member, Bank Of America, will report its results on Monday. It’s not an entirely favorable environment for any of these firms. With higher interest rates, the growing threat of recession, and a stock market that’s not setting the World on fire, let me suggest a couple of key indicators for both sides.
The most significant concern for commercial banks will be loan losses. These new higher interest rates translate into higher monthly payments for commercial and retail bank clients. Inevitably in times of higher rates, some customers can not make the payment. For the Banks, these customers represent a potential loss if they fail. The loan is written off and added to the “Loan Loss” category on the Bank’s income statement. Recently bank loan losses have been rising, but nothing to be overly concerned about. But a significant indicator to watch today.
On the other hand, Blackrock does not make loans—no loan loss reserves for Blackrock. What Blackrock does need to be concerned about are its asset levels. Remember, Blackrock is a reasonably one-dimensional company. Investment management fees are its bread and butter. Each dollar that walks out the door translates into lost income. That’s why Blackrock’s reputation is so important. If enough investors grow weary of Blackrock’s pushing social issues and switch to another fund company, and there are plenty out there, it could mean real trouble for Larry Fink’s company.
Additionally, Blackrock stands under the shadow of any potential bear market. A condition that is always present, but again a possible reason for investors to walk away.
So there you have it, five members of the World of AUM, all reporting their quarterly results early this morning, before the Market Opens. I’ll be catching those earnings from my perch at ValueSide.com. Join me.