Third Point, the hedge fund of billionaire money manager Dan Loeb, has made a big bet on BlackRock Inc. (BLK), which is famous for being the world's largest asset manager. In a recent client letter from the last week of July, Third Point indicated that it believes "BlackRock is a misunderstood franchise that is just beginning to inflect." What is it about BlackRock that has piqued Loeb's interest? He and his team see the company not just as an asset manager, but rather an index-type business or network. Here are some of the details behind Third Point's new interest in BlackRock.

Earnings Power Driven Both by ETFs and Data and Analytic Services

Third Point's client letter, quoted in a report by Business Insider, suggests that BlackRock has exceeded its initial aspirations as an asset manager which relies on market movements. Rather, "it is increasingly becoming a network or index-like business, with earnings power driven by ETFs (via iShares) and data & analytic services (via Aladdin). These are oligopoly businesses with faster growth and much higher incremental margins than traditional asset management - and thus deserve much higher P/E multiples over time."

Beyond the potential for increased earnings power, Third Point feels the firm is currently undervalued and that it is just beginning to reflect its potential. The letter points out that shares are "at less than 15x our 2019 EPS forecast," and that there is "an outlook for consistent mid-teens EPS growth," both of which could be signs that the company is underappreciated by the investing world.

iShares a Powerful Driver of Success

Loeb's fund feels that iShares in particular is an important driver of success for BlackRock, and the letter notes that "in the U.S., iShares had more inflows in 1H17 than the next 10 competitors combined." If the acceleration in ETFs is only beginning to be felt, as Third Point believes to be the case, there is even more potential reward.

BlackRock's CEO, Larry Fink, shared Third Point's sentiments on ETFs in a report earlier this month. He confirmed that "index and ETFs still only represent 10% of the entire equity market global capitalization. With $160-odd trillion global equity market capitalization, we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning."

Loeb is one of the rare hedge fund managers to beat the S&P 500 so far this year. While the S&P has made gains of 9.3% for the first half of the year, Third Point has climbed by 10.7%. Its offshore fund gained 4.6% for the second quarter, as compared with 3.1% gains in the S&P 500 for the same period, according to the client letter.

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