BlackRock Breaks Out Of Its Bonds
Ever since he started at the old First Boston in 1976, Laurence D. Fink has been a bond guy. In the 1980s, he helped create a new type of security backed by assets such as mortgages, and today that's a $4 trillion market. Today, he's chairman and chief executive of New York's BlackRock Inc. (BLK ), one of the largest bond-fund managers in the world. This track record put Fink's name on the grapevine as a possible successor to Philip J. Purcell after the Morgan Stanley (MWD ) CEO said on June 13 that he planned to retire. Neither Fink nor Morgan will comment, and many other names have also been floated for the job.
There's no doubt, though, that Fink, 52, isn't satisfied with being just a bond titan. He'd like BlackRock to be famous for equities, too. So in January, BlackRock, which is 70% owned by bank-holding company PNC Financial Services Group Inc. (PNC ), shelled out $375 million to buy MetLife Inc.'s (MET ) State Street Research & Management. The deal added $50 billion in assets, including $17.6 billion in stock funds. And he has also worked to turn around a family of ailing stock funds that BlackRock bought in 1998 from PNC -- at PNC's behest -- by poaching top fund managers from rival firms.
After his success in bonds, why would this Master of the Universe want to plunge deeper into risky stocks? Partly, it's for diversification -- bonds won't be hot forever. Clients are clamoring for more equity, he says. And, as Fink puts it, "maybe that's where my hubris lies."
Boosting the stock side, which makes up 8% of BlackRock's $400 billion in assets, has been a struggle. The BlackRock Large Cap Growth Fund underperformed 90% of similar funds during the 2000-2002 bear market, says Morningstar. BlackRock's Small Cap Growth fund trailed more than two-thirds of its peers in the same period. State Street's two biggest funds, Aurora and Investment Trust, also have had mediocre returns in recent years.
But BlackRock is showing progress. In 2002, Fink raided rivals MFS Investment Management and Boston Partners, bringing over talent that has lifted the small-cap growth fund into the top 20% for the past three years. In 2003, Fink hired away a large-cap team from Weiss, Peck & Greer LLC. As a result, the large-cap growth fund has gained 8% in the past year to rank in the top two-thirds of its peers. He switched managers on the two big state street funds, too. "It's a two-, three-, five-year process," he says.
With lots of fund companies on the market, investment bankers frequently call Fink to offer up a deal. But he says: "I doubt there is something that's going to fit our needs." Unlike some competitors, such as Baltimore's Legg Mason Inc. (LM ), Fink doesn't want any acquisitions operating independently. He'll make a deal only if the company can be integrated into BlackRock. "We have one platform and one organization," he adds.
Fink says he bought State Street because it would fit in. It was run by Richard Davis, who co-headed the bond department with him at First Boston in the 1980s. The deal didn't happen quickly: Fink badgered MetLife CEO Robert H. Benmosche to sell for two years. After Benmosche finally agreed, competitors tried to horn in. But MetLife never got serious with anyone else, says the insurer's chief financial officer, William J. Wheeler. That's because half of State Street's assets come from MetLife customers. "We were going to have a continuing relationship so we identified a preferred buyer," says Wheeler.
NO RUSH TO MERGE
Fink became a bond guy solely by accident. After growing up in Los Angeles and earning an MBA from the University of California at Los Angeles, his goal was a career in real estate finance. But one of his B-school professors, a squash partner, suggested that he interview with New York investment banks. He started at First Boston in the then-sleepy area of mortgage securities. By age 28, Fink was First Boston's youngest-ever partner.
Eventually Fink and some friends at Lehman Brothers Inc. (LEH ) thought they might earn more by investing in bonds rather than selling them. They decamped to the offices of the private-equity firm Blackstone Group Inc. in 1988 to form their own shop. Their business exploded after General Electric Co. (GE ) tapped it to manage the $7 billion of bad mortgage-backed debt that remained after it dumped its Kidder Peabody Group Inc. brokerage unit in 1994. That brought new clients and the attention of PNC, which bought BlackRock in 1995. The bank sold a small stake to the public in October, 1999.
Fink may want to expand beyond bonds, but bonds have been good to BlackRock. Since it went public, the stock has quintupled while the Standard & Poor's 500-stock index has lost 5%. Last year, BlackRock earned $143 million on revenue of $725 million. And as the bond money keeps flooding in -- a net $5 billion in the first quarter -- analysts expect earnings per share to rise 36% this year, according to First Call.
So for all of Fink's efforts, BlackRock remains a bond shop for now. That's seen in the share price, which reached a record $82.45 in February before dropping as low as $69.38 along with the bond market in the spring. Bonds have since recovered, as has BlackRock's stock, but investors could turn on the firm if the long bull market in bonds finally ends. By then, Fink hopes to be known as an equity guy, too.
By Aaron Pressman in Boston