February 13, 2006
BONDING IN A BULL MARKET
Merrill Lynch is reportedly in talks to acquire a 50% slice of BlackRock, well known for its bond funds although it manages equity too. Merrill's coup is said to come at the expense of Morgan Stanley, which also tried but failed to get a piece of this rock.
If there's any confusion as to what makes BlackRock so attractive, a quick look at the fixed-income manager's stock price will alleviate any stupefaction. Indeed, soaring share prices usually explain any frenzy over asset buying.
As it happens, there's been no shortage of ascending performance in fixed-income land of late. Just ask the managers of Loomis Sayles Strategic Income, a mutual fund that searches the globe for alluring bonds, a strategy that's fueled the mutual fund with a three-year annualized total return of more than 16% through the end of last year, according to Morningstar. That beats the Lehman Brothers Global Aggregate bond index's 5.5% over that span, as well as the S&P 500's 14.4% run. Everyone loves a winner, and some want to own it when it's hot. Long live momentum.
BlackRock's no slouch in cashing in on the bull market in bonds. As a business, the times could hardly be more flush for the firm. That said, the cat's long been out of the bag on this score. The company's shares are up more than 60% over the past year, more than ten fold higher than the stock market's return over that span, based on the S&P 500, reports Yahoo Finance. BlackRock's stock is no recent arrival to its bull market, having soared some ten-fold over the past six years as well.
It's also no great mystery what's behind BlackRock's success. Bond yields remain relatively low of late, after having fallen for the better part of a generation. What's not to like? Falling followed by relatively stable low yields is a bond manager's claim to fame in the 21st century. Accordingly, net income for the fixed-income manager has climbed more than 290% in 2005 from 1999, mirroring the fortunes that accompany life among the fixed-income set when yields fall and don't get up.
But if it's a great time to buy bond managers, along with bonds, using rear-view mirrors, how will the purchase square with the years ahead? If the BlackRock acquisition is deemed a savvy move today, with the yield on then 10-year Treasury under 4.6%, how might the transaction be described several years hence if yields are materially higher?
The answer depends on your expectations for the price of money. To wit, do you expect inflation, deflation, or something in between, and how much? We can surmise Merrill's forecast.
Posted by jp at February 13, 2006 9:35 AM
the $2 trillion in cash on corporate balance sheets... they manage it
Posted by: vfoster at February 13, 2006 5:08 PM