What’s Going On Here?Steady… steaaaaady… investment bank Morgan Stanley and the world’s largest investment manager BlackRock reported earnings on Thursday that showed investors were calmer under pressure than it seemed last quarter. What Does This Mean?Like its competitors, Morgan Stanley benefited from a bump in first-quarter trading activity that gave the segment’s revenue a boost. But the bank makes most of its profit from “wealth management” – i.e. looking after rich people’s cash – and that business didn’t do as well as expected. That’s likely in part because some of those investors took their money out of fee-generating investments and opted to sit on cash instead.
It was a different story for BlackRock: the near-$7 trillion it manages for investors shrank versus the quarter before, which matters because the firm makes most of its revenue from the percentage of the pot it takes as a fee. After last month’s market selloff, the drop was largely unavoidable – even though more investors put cash into BlackRock’s funds than took it out. Why Should I Care?For you personally: The jungle is passive.
Unlike “active funds” where a manager makes decisions for you, popularized “passive funds” track the performance of stock market indexes – often via exchange-traded funds (ETFs). So while “retail investors” did take cash out of certain BlackRock funds last quarter, that was more than offset by the amount they put into the firm’s ETFs instead – whose lower fees might’ve saved them money (tweet this). Institutional investors, meanwhile, took more money out of passive funds than active funds – suggesting they were willing to pay a premium for hands-on money management in uncertain times.
The bigger picture: $13 billion well spent?
Morgan Stanley may have disappointed investors, but the bank will likely be hoping its typically predictable and highly profitable wealth management business will drive future growth. Its $13 billion purchase of online broker E*TRADE, for one, should help boost its customer base and the amount of cash it manages. | 