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BlackRock Fund Family Review

Taken from the February 2008 issue of The Retirement Advisor newsletter

BlackRock Founded: 1988 by Laurence D. Fink
Corporate Headquarters: New York, New York

Mailing Address for Regular Delivery:
BlackRock Funds
c/o PFPC Inc.
P.O. Box 9819
Providence, RI 02940
Mailing Address for Express Delivery:
BlackRock Funds
c/o PFPC Inc.
101 Sabin Street
Pawtucket, RI 02860

Assets Under Management: Approximately $1.3 trillion in mutual funds, separate accounts, real estate strategies, and alternative investments
 
Number of Mutual Funds: Approximately 90, not including target-date funds
 
Average Expense Ratio: 1.55% for domestic stocks, 1.65% for international stock, and 1.05% for taxable bond funds.

Starting with only $1 billion in assets in 1988, BlackRock has grown into a multinational investment organization (with offices in nearly 20 countries, such as the UK, China, Hong Kong, Germany, France, Belgium, Australia, Singapore, etc.) with $1.3 trillion in assets under management.  Known historically for its focus on institutional investors, only about $100 billion or so of these assets are invested in BlackRock’s mutual funds (excluding money market assets).  The vast majority of assets is invested in institutional separate accounts, hedge funds, real estate, and structured finance strategies.

Because of this, BlackRock generally did not roll out retail versions of its strategies or institutional funds as early as their larger competitors.  With BlackRock’s acquisition of State Street Research in 2005 and Merrill Lynch Investment Managers in 2006, this is now changing.  More importantly, BlackRock has historically shown a great willingness to invest in its talent and new technologies.

From a retail investor standpoint, this has helped tremendously – as this has resulted in BlackRock in doing a much better job in reaching out to its retail investors, though things such as weekly market commentaries on its website and detailed shareholder reports.  There is still room for improvement, but BlackRock has made rapid progress in this area over the last couple of years.

It is generally not a bad thing to invest in an investment management company that has historically catered to institutional investors and that is making a true effort in bring their services to retail investors as well.  The reason is obvious: In general, institutional investors are much more demanding and have much less tolerance for investment risk, lack of consistency, and operational missteps than retail investors have.  Such a focus has made BlackRock into an excellent institution – with its heavy emphasis on hiring the best talent, investing in the best technology to analyze and manage risk, and generating consistent and reliable returns.  Case in point: BlackRock actually sells its risk analysis software to many banks and insurance companies, which creates a heavy amount of incentive to continue to develop and improve risk analysis tools going forward.


Despite this, however, BlackRock was not immune to the “subprime debacle” within their corporate bond portfolios.  One major reason is that many of these funds are legacy Merrill Lynch Investment Managers funds.  While BlackRock has made it a priority to integrate BlackRock’s risk management and analysis solutions into legacy ML offerings, this has not resulted in any material improvement so far.  Until BlackRock can improve the performance in their fixed income mutual funds, the jury is still out.

In terms of fees, BlackRock ranks only “average” in all of the broad categories.  For example, the average expense ratio of its domestic equity funds is 1.55%, or over 100 basis points higher than the expense ratio of the Dodge & Cox Stock Fund and 97 basis points higher than the expense ratio of the American Funds Fundamental Investors fund (one of our recommended actively managed domestic equity funds).  We believe BlackRock could further reduce fees across many of its mutual funds.  This is especially important in BlackRock’s fixed income mutual funds, where a mere 25 basis point difference could be a significant hurdle to outperforming one’s peers over time.

Overall, we believe BlackRock is an excellent investment management institution with a great investment philosophy, corporate culture, investment talent, and risk management systems.  That being said, it is still having trouble integrating many of the Merrill Lynch legacy funds into BlackRock’s investment and risk management umbrella – as the underperformance of its bond mutual funds during 2007 can attest to.  This will take some more time but we are optimistic.  Moreover, we believe BlackRock has the ability to lower its fees even more across many of its fund offerings – and until they do, we will refrain from investing in any of BlackRock’s mutual funds at this time.

Long-Term "Retirement Advisor" Model Portfolio Performance
The Retirement Advisor Model Portfolio NameDollar Value
on 5/31/2008
Percent
Increase
Aggressive Growth and Income Model Portfolio 1
Initial Value of $200,000 on 1/1/2007
$218,5609.3%
Moderate Growth and Income Model Portfolio 2
Initial Value of $200,000 on 1/1/2007
$217,9999.0%
Conservative Capital Preservation Model Portfolio 3
Initial Value of $200,000 on 1/1/2007
$219,92310.0%

Free Samples:   January 2007    January 2008  

Model Portfolios 2007 Results:

The Retirement Advisor Aggressive Growth and Income Model Portfolio 1 , designed for someone approaching retirement who is interested in a portfolio allocation designed to provide income and capital appreciation while avoiding excessive risk, gained 9.52% in 2007, its first year of existence. This portfolio was 50% in stock index funds and 50% in fixed income index funds (or ETF equivalents.) It benefited greatly from TIPS for inflation protection which we feel allows a lower allocation to equities and a 4% withdrawal rate.

The Retirement Advisor Moderate Growth and Income Model Portfolio 2 , designed for someone who has retired and seeks to maintain their current standard of living, even with inflation, gained 8.48% in 2007, its first year of existence. This portfolio was 30% in stock index funds and 70% in fixed income index funds (or ETF equivalents.) It benefited greatly from TIPS for inflation protection

The Retirement Advisor Conservative Capital Preservation Model Portfolio 3 , designed for someone in the later stages of retirement who wants to avoid any losses in their portfolio and who does not need a lot of inflation protection, gained 8.32% in 2007, its first year of existence. This portfolio was 100% in fixed income index funds (or ETF equivalents.) It benefited greatly from TIPS for inflation protection.

 

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