BlackRock brass cited 'Aperio' again and again, today, amid analysts' grilling about 'depressed flows' -- it bought the direct-indexing unit in the feverish grab of 2020-2021

Grappling for answers to “depressed' results attracting new assets, BlackRock saw a bright spot during its latest earnings call – ”Aperio" – not that it's moved the needle much yet. 

CEO Lawrence Fink and chief financial officer Martin Small admitted disappointment about slipping inflows on today's call with analysts. 

But he stressed that help is on the way – BlackRock's “transformational” direct indexing unit, Aperio, the asset manager it announced buying in Nov. 2020 for more than $1 billion in cash.  

“Acquisitions like eFront and Aperio …they have been smaller in size [than iShares], but were also transformational in their own way. Organic growth in Aperio has been over 20% since our acquisition," they said.  See: Despite tepid net flows in 2020, Aperio finds its white knight; BlackRock makes a deal to compete with buyers of Parametric, Motif and Folio

In all, Small and Fink mentioned Aperio seven times, though none of the analysts asked about it. 

Fink noted that Aperio was growing 20% organically. Small called it “high teens” growth.

Jump start

Neither offered any details about AUM or the unit's profitability, nor did they say how much of Aperio's new assets are being cannibalized from BlackRock products. At the time of purchase, Aperio had $39 billion in AUM. billion by now.

If it's grown 20% annually in the past three years, it would be near to $65 billion in assets under management by now – still significantly fewer than 1% of BlackRock's $9 trillion in total managed assets.

The commentary came amid BlackRock's (BLK) stock slump. Shares are down about 12% for the year and fell another 1.34% today (Oct. 13) on the earnings news. 

BLK closed at $627.66 and was edging lower in after-hours trading. The stock is mid-range between its 52-week high and low of $547.59 and $785.65.

At the time it was acquired, direct indexing experts observed that BlackRock had paid up for Aperio simply because it was a way to jumpstart its direct-indexing entry.

"The valuation is clearly not driven solely by AUM, but rather the strategic priority for BlackRock to expand its capabilities in custom indexing quickly," said Joshua Levin, in the 2020 RIABiz interview.  Levin is co-founder and chief strategy officer of OpenInvest, a San Francisco direct-indexing startup that was subsequently sold to JPMorgan.

“The space is red hot and is providing a differentiated source of value in an otherwise evaporating asset management landscape,” he said.

Chipping away

Though it was red-hot then – with Motif, Folio and Parametric being acquired in quick succession, along with Aperio, those companies and their derivatives have been stony quiet ever since. 

Bill Crager, CEO of Envestnet, was an exception. On his company's second quarter earnings call in August, he also mentioned direct indexing as a bright spot – at least in terms of its growth rate. See: Bill Crager signals comity with Lauren Taylor Wolfe and Envestnet also has a Sipp secret weapon, analyst says

“In our direct-index business, which we're one of the leaders in the industry, we're significantly growing assets -- year-over-year growth, 41%. 

"Account numbers are up 26% year-over-year. And advisor usage, new advisors using that platform, advisors are up 47%. So, in the market environment, we continue to chip away,” he said. 

Besides stormy investment markets, direct-indexing largely hitched its star to environment, social and governance (ESG) investing, which has undergone a rough stretch, mainly from conservative Republican attacks.  

Because direct-indexing is a form of SMA or separately managed account, the securities get held directly, hence ESG stocks can be plucked from the portfolio, if found offensive, while leaving most of the index intact. See: How fooling around with ESG put Vanguard and BlackRock on countdown for still selling many ETFs as 'passive' indexing portfolios

Center stage

Yet, clearly, BlackRock – which had its own ESG comeuppance – is high on Aperio and its future. See: Texas just pronounced BlackRock guilty of pandering to sustainable investing interests -- and BlackRock is having none of it

When Craig Siegenthaler, analyst for Bank of America Merrill Lynch, asked a slamming question, Aperio's growth carried the load as the single tangible.

“Your flows are arguably depressed versus a longer-term run rate,” the analyst said. “So how do you think about the four organic growth [trajectories], and the potential money in motion?”

“Over a cycle, Craig, we still see a really clear path to 5% plus organic, base-fee growth with our platform strategy," answered Small. 

"We keep growing and scaling private markets, the rerisking of global investment portfolios. We're continuing to see high-teens growth in tax-managed direct indexing with Aperio.”

When Goldman Sachs analyst Alex Blostein asked about achieving targets with M&A, Aperio featured again in Small's answer.

“The centerpiece and hallmark of the M&A strategy, here, has always been about accelerating organic growth,” Small said. “It's been about developing capabilities that we don't have and or de-risking capabilities that we're building.

“And I'd say when you look at eFront, when you look at Aperio, when you look at many of the transactions Larry has talked about, that's really been the center of the strategy. ”

Aspirational aspect

Fink went so far as to profess love for Aperio – albeit as a cog in BlackRock's machine.

“We love the opportunity of having Aperio,” he said with brio. "But it's a part of a big organized firm."

Fink added: “The one thing that I could tell you when we do integrations of firms, we are not going to be a boutique. We are going to be organizing it and building it out.”

Crager, too, conceded there's still an aspirational aspect to direct indexing – awaiting a catalyst. -- despite growth. 

“Advisors are using it; 47% more advisors year-over-year, but the account flow isn't all there,” he said. 

“And I think that when the catalyst occurs, you're going to see the benefit -- an accelerated benefit – across our platform, particularly in these high-value personalized solutions, which is exactly where the market is headed.

"And that's how we've positioned ourselves.”