Banking on boomers
Few companies have been as successful at winning shelf space in 401(k) plans as Newport Beach-based Pacific Investment Management Co. Under the guidance of chief investment guru Bill Gross, Pimco bond funds have become a staple in thousands of 401(k)s.
But investors may be seeing an unfamiliar name -- BlackRock Inc. -- pop up more frequently on their retirement plan menus. Analysts say that could be good news for individual investors, especially if BlackRock brings new products at competitive rates.
“For the average investor, this should mean over time that their costs will go down and the investor should benefit through higher returns,” said Geoff Bobroff, a fund industry consultant in East Greenwich, R.I.
Like Pimco, BlackRock made its bones running bond funds for pension plans, insurance companies and other large investors. And also like Pimco, it now plans a big-time expansion in the “retail” space, courting small individual investors directing their own portfolios.
But to succeed in 401(k)s, New York-based BlackRock is using a different game plan: focusing on lifecycle funds, one of the fastest-growing parts of the retirement fund business.
A lifecycle plan contains a mix of stock and bond funds that adjusts over time. When workers are in their 20s and 30s, most of their money is in stock funds, which offer the potential for big gains but also the risk of big losses. As a lifecycle fund’s account holders get older, its assets are gradually shifted to the relative safety (but lower returns) of bonds.
Like the electric oven advertised in a much-played TV infomercial, the aim is to “set it and forget it.”
These funds, also known as “target date” funds, are getting a big boost from last year’s Pension Protection Act, which allows companies to automatically enroll workers in 401(k) plans. BlackRock plans to launch nine lifecycle funds next month.
“There are not that many people with an established footprint” in lifecycle funds, said Barbara Novick, vice chairwoman of BlackRock. “I would hope to become a leader over time.”
Though competition in lifecycle funds is heating up, “it seems like a smart strategy for BlackRock and one where there’s lots of opportunity,” said Tom Modestino, a senior analyst at Cerulli Associates in Boston.
BlackRock is also looking to bolster its presence in bond funds, amid rising demand among individual investors for such funds.
Industrywide, bond mutual funds had a net cash inflow of $60.8 billion last year, up from $31.2 billion in 2005, according to the Investment Company Institute.
In the first two months of this year, the net cash inflow was $31.1 billion -- up from $16.9 billion a year earlier.
One reason for the trend is that as baby boomers near retirement, they’re shifting more of their portfolios to bonds and away from stocks. That’s partly why BlackRock is making a big push to gain market share with 401(k) account holders and other small mutual fund investors.
“This is a real important growth area for the firm,” BlackRock founder and Chief Executive Laurence Fink said in an interview. “We see this as being one of the large opportunities for us.”
Under Fink -- who grew up in Van Nuys and received his bachelor’s and MBA degrees from UCLA -- BlackRock became one of the fund industry’s bigger players late last year when it acquired Merrill Lynch & Co.’s gigantic fund unit, which specialized in stock mutual funds offered to individual investors.
The acquisition gave BlackRock a door into the retail market. As it seeks to introduce itself to average investors, the firm has spent more on advertising in the last six months than in its first 18 years in business. Its marketing budget more than doubled last year, to nearly $142 million.
To succeed, however, analysts say the company will need to improve its performance, which has been average overall, according to data from fund tracker Morningstar Inc.
BlackRock’s Total Return Portfolio posted a return (share price change plus any interest or dividend income) of 1.1% in the first quarter, according to fund tracker Morningstar Inc. Pimco’s comparable Total Return Fund bested that with a 1.6% return.
“High fees have really made [BlackRock’s bond funds] unattractive to a retail consumer,” said Rachel Barnard, an analyst at Morningstar Inc. “And the stock funds have always been mediocre to bad in terms of performance.”
BlackRock sells its funds through intermediaries such as stockbrokers and financial planners. Its funds all charge upfront fees, known as loads, though they don’t assess such charges in 401(k) accounts.
Fink said performance was picking up.
‘“We are 100% committed to ... delivering strong investment performance for all clients,” Fink said. “We’re off to a strong start following the close of the merger” with Merrill Lynch.
BlackRock has lowered its bond-fund fees in recent years. They have dropped from 1.31% in 2001 to 1.02%, according to Morningstar. That compares with 0.98% at Pimco and an industry average of 1.05%.
As for Pimco, it says it’s not fazed by the heightened competition.
“We’ve been here for many years,” said Brian Jacobs, co-head of sales for the unit that distributes Pimco funds. “It’s hard to replicate that overnight.”
BlackRock’s size and Wall Street credentials give it distinct advantages, but the retail and 401(k) businesses are highly competitive. BlackRock will have to persuade stockbrokers to recommend its funds and 401(k) companies to pick it for retirement plans.
That industry process hasn’t always been the most consumer friendly.
Until regulators cracked down recently, some mutual-fund companies paid brokerages to place them on lists of “preferred” funds that were recommended to small investors.
The 401(k) business is undergoing similar scrutiny over a practice known as revenue sharing in which fund companies make payments to the 401(k) administrative firms that put together the retirement plans.
The payments are supposed to reimburse the firms for the cost of maintaining 401(k) accounts. But critics say fund companies sometimes make extra-large payments to win a spot over a competitor.
“In some ways, it’s just paying your fair share,” said Gary Caine, Southern California regional director of the Multnomah Group, a 401(k) consulting firm based in Portland, Ore. But “nobody gets on a 401(k) menu without a willingness to pay.”
BlackRock officials say they will compete solely on the investment returns of their funds.
“We have good performance,” said Novick, the BlackRock vice chairwoman. “We have good products. If the clients want you, we’re going to be” among the funds offered.
Most analysts agree that BlackRock has proven itself as an institutional manager. Since 1991, its core bond composite -- a measurement of its institutional-account performance -- has outperformed the benchmark Lehman aggregate-bond index every year but one.
“For institutional bond management, they’re the creme de la creme,” Barnard said.
The steady performance boosted assets under management -- BlackRock now manages more than $1.1 trillion -- and plumped its stock price. Its shares have quadrupled in value since 2002, vs. a 90% rise for the NYSE financial firm index. BlackRock rose 73 cents Thursday to $156.51, up 3% since Jan. 1.
CEO Fink, 54, who as a boy worked at his father’s shoe store, arrived on Wall Street in 1976. He made his mark as a mortgage-bond trader before launching BlackRock with seven colleagues in 1988.
Though BlackRock owns mortgage bonds, including some tied to troubled sub-prime loans, it has stuck to relatively safe holdings in those areas, said Keith Anderson, chief of BlackRock’s bond unit.
Its risk-averse strategy, however, has dulled BlackRock’s recent performance. Almost 59% of competing bond funds have topped BlackRock’s performance in the last year, according to Morningstar.
But it shielded the portfolios from losses when sub-prime bonds plummeted in the first quarter.
“Not blowing up gets you good performance,” Anderson said.
“We are not the manager to get you 3% more than the benchmark because we’re not the manager to lose” that amount.
