Can Anyone Bury BlackRock?
The world’s largest money manager’s ubiquitous portfolio platform wasn’t the first. But even some competitors say it’s the best.
Apple has the iPhone. Netflix has House of Cards. Bloomberg has the terminal. And BlackRock has Aladdin.
Aladdin, for those not inserted into the bloodstream of institutional asset management, is the industry’s dominant platform for keeping track of portfolios. It wasn’t the first — since the 1980s mundane tools like accounting software, allocation modeling systems, and market data feeds have become essential — but it has been, for more than a decade now, almost certainly the best.
It was early 2006 when the second-largest pension fund in America discovered Aladdin, the portfolio operating system commercialized by BlackRock at the start of the century. The fixed-income team at the California State Teachers’ Retirement System was searching for a better way to keep track of what was then a $32 billion bond portfolio.
Among the providers under consideration were Wilshire Analytics and Charles River Development, which each supported front-office functions like risk management and performance attribution. Charles River, in particular, had made a name for itself with its portfolio management software, which by the end of 2006 had more than 225 clients across 30 countries.
Both were rejected in favor of BlackRock’s Asset Liability and Debt and Derivative Investment Network — Aladdin, for short.
“They were the most comprehensive,” says portfolio manager Rosie Lucchesini-Jack. “They could support all the different asset classes within fixed-income at the time.”
Although it had been commercially available for only a few years, Aladdin was already sought after by institutional investors eager to get their hands on the risk calculator behind BlackRock. Since its founding in 1988, BlackRock had developed a reputation for strong risk management. The Federal Reserve Board of New York, for example, picked the firm during the financial crisis to manage a $30 billion portfolio of Bear Stearns assets after the bank collapsed.
Today the Aladdin platform supports more than $18 trillion, making it one of the largest portfolio operating systems in the industry. BlackRock says Aladdin technology has been adopted in some form by 210 institutional clients globally, including asset owners such as CalSTRS and even direct competitors like Vanguard.
And BlackRock has no intention of stopping here. The world’s largest asset manager has, over the past few years, placed a huge emphasis on technology — CEO Larry Fink is aiming to have 30 percent of the firm’s revenue derived from tech by 2022. It is an ambitious vision that encompasses a number of tech initiatives, among them an artificial intelligence lab and a series of fintech acquisitions. But a key factor is the continued growth of the Aladdin business.
BlackRock’s competitors aren’t going down without a fight.
Charles River, for its part, has joined forces with State Street to create what the two firms are describing as the “first-ever global, front-to-back, client servicing platform from a single provider.” Others, like Copenhagen-based SimCorp, are countering BlackRock’s efforts with aggressive expansions of their own. The European firm is now targeting growth in the North American market, where it sees its Dimension platform and BlackRock’s Aladdin as “the only game in town,” according to James Corrigan, managing director of SimCorp North America.
“If you look at us versus some of the other large providers in the industry, based on our research we’re all roughly the same size,” he says. “On a global basis we’re relatively neck and neck [with Aladdin] in terms of the race to win this market.”
Others, however, see BlackRock in the lead. As one former competitor puts it, “It will be hard to catch them unless they lose their focus.”
When Goldstein joined BlackRock as an analyst, it was 1994 — the year of what Fortune magazine dubbed the Great Bond Massacre. Fixed-income portfolios blew up amid rising interest rates and shrinking bond prices — and the risk analytics BlackRock had spent years developing were thrust into the spotlight.
“We started to get calls from clients saying, ‘Can you take a look at my whole portfolio through the risk capability that you have?’” Goldstein recalls. When a Kidder Peabody trader was caught manipulating the firm’s profits, resulting in a scandal that caused parent General Electric to sell the securities firm’s assets, GE hired BlackRock to liquidate Kidder Peabody’s mortgage portfolio. “That led to us getting a fair bit of demand to run portfolios through our platform that BlackRock didn’t manage directly,” Goldstein explains. “That really planted the seed for Aladdin.”
Over the next six years, there was continued demand for BlackRock’s risk management services, and by the late ’90s, institutional investors were interested in installing BlackRock’s operating system at their own organizations. That first external implementation of the Aladdin platform was finished in 2000, and with it BlackRock Solutions was born.
As BlackRock explained in that year’s annual report, the goal of the Solutions business was to “leverage the investments BlackRock has made over the past 13 years in developing a highly sophisticated portfolio management system. . . . In effect, clients are offered the same capabilities that support BlackRock.”
By the end of that year, the firm’s “assets under risk management” exceeded $1.3 trillion.
“What we’ve done is unique, and what makes it unique is the fact that we, BlackRock, are the largest user of the platform,” Goldstein says. “This notion of ‘We eat our own cooking’ brings us to this higher discipline than what we’ve seen in the market. And I think that is strongly resonating.”
Also resonating with clients are the breadth and depth of the Aladdin platform, which supports a full range of investment functions across all the major asset classes.
“Not only does it provide risk transparency, but it also provides an ability to model trades, to capture trades, to structure portfolios, to manage portfolio compliance — all of the operating components of the workflow,” Goldstein says. “It’s a comprehensive, singular enterprise platform versus a model where you’re piecing together a lot of things and trying to figure out how to interface them.”
In a market that’s traditionally been very fragmented, BlackRock’s ability to offer an integrated, multipurpose platform has proven a strong selling point for prospective clients — even when it’s up against competitors that perform specific functions better.
Take CalSTRS, for example. Ten years after the pension fund’s fixed-income team adopted Aladdin, its global equities team went on the hunt for a portfolio management system of its own. The decision, as portfolio manager David Murphy describes it, came down to two options: Hire the best-of-breed provider, or use the same platform as the fixed-income team. In the end, the ease of a consolidated system won out.
“It’s a single integrated platform for CalSTRS’ investment staff,” Murphy says. “It’s nice to have that seamless platform which provides functionality usually found with a best-of-breed–type solution.”
There are only a “very limited” number of providers that can truly support the full range of investment operations on a single system, according to Claudio Prutz, who leads digital efforts at Munich Re’s internal asset management arm. One is BlackRock, and another is SimCorp. Prutz says his firm, MEAG, has been using SimCorp’s Dimension since 1999, when MEAG was first spun off from the German reinsurance company. Today the asset manager uses the SimCorp platform across nearly all aspects of its business, from performance measurement and risk management to trading and settlement. Just about the only thing that’s not run on Dimension is MEAG’s special ledger, which the asset manager manages on SAP.
“A very high value in using not only SimCorp Dimension but any integrated platform is the standardization of processes and the integration of data,” Prutz says. “That brings not only cost efficiency, but also more insight and trust in the data. The same information is used by everyone in the organization.”
It’s a viewpoint shared by a large proportion of institutional investors. According to SimCorp, 38 percent of the 200 largest investment managers are Dimension users. Among the top 50, nearly half are SimCorp clients. (BlackRock, by comparison, says Aladdin serves about 20 percent of top 200 asset managers globally, 23 percent of the top 100 pension funds in the U.S., and 17 percent of the world’s 250 largest insurance companies.)
And Dimension continues to attract new clients: Just the other week, SimCorp announced another bank had signed on to use Dimension in its balance sheet operations.
“To use the Wayne Gretzky analogy, he used to say that he would skate to where the puck was going to be, and not to where the puck has been,” says SimCorp’s Corrigan. “We’ve been skating to where the industry is moving. And we think it’s moving toward us.”
If the industry does continue to consolidate, specialized portfolio software — in compliance systems, for example, or back-office support — could be squeezed out.
Some providers are responding to this threat by doubling down on what they do best. MSCI, for instance, continues to invest in its popular portfolio analytics business, this year launching new tools for factor analysis and environmental, social, and governance investing. “We’re never going to finish investing in this thing, because the state of the art is constantly moving,” says Jorge Mina, MSCI’s head of analytics.
Other providers, meanwhile, are trying to match competitors like Aladdin and Dimension by expanding their own product offerings — often through acquisitions. Portfolio software company SS&C Technologies has centered its entire business strategy on buying up other companies, acquiring 51 businesses over the past 23 years.
The latest competitor to make the move toward a full-service, front-to-back offering is Charles River, which has been acquired by State Street. The deal will combine Charles River’s widely used front-office software with State Street’s back- and middle-office expertise.
“By integrating Charles River’s tools, we will provide our clients access to standardized, real-time data from a single platform, enabling them to analyze and understand their investments holistically and make it easier for them to put their data to use,” State Street says in a statement to Institutional Investor.
With $25 trillion in institutional and wealth assets already managed on Charles River’s platform, the acquisition could create a powerful new rival. Still, SimCorp’s Corrigan doesn’t seem too worried.
“They’re still having multiple platforms that they have to stitch together, a very different philosophy and approach to SimCorp,” he notes.
State Street, for its part, seems to be positioning its forthcoming platform as more of a complementary service, noting that the platform would be able to “connect and exchange data with other industry platforms and providers” such as Aladdin, “for which State Street will strive to be the custodian of choice.”
“Once you have opted for such a platform — and this is not unique to SimCorp — you are bound to it because you invest a lot of money and that should pay out over time,” he says. “You have to build trust very fast, as over the years it becomes more difficult to change because your processes adapt to the system.”
Now BlackRock strives to make its tools indispensable for wealth management firms. “We’re trying to give the power of Aladdin to financial advisers and distribution providers,” COO Goldstein says.
Since Aladdin’s entry into the retail space last year, BlackRock says the technology has been adopted by a handful of new clients, including divisions like UBS Global Wealth Management and Morgan Stanley Wealth Management.
The UBS unit was the first financial advisory firm to introduce Aladdin to its business, a decision advisory solutions head Michael McVicker describes as a “tremendous success” for its clients and financial advisers.
“It’s been very well received into the field,” he says. “It’s a very user-friendly tool, and it’s enabled advisers to do a better job.”
Reviews were similarly positive at Morgan Stanley Wealth Management, which worked with BlackRock to build a customized platform powered by Aladdin’s risk analytics engine. Chris Scott-Hansen, head of portfolio and trading solutions, says BlackRock allows its financial advisers to monitor risk in clients’ entire portfolios — not just their assets managed by Morgan Stanley.
“Transparency into risk within the business and client portfolios has been amplified,” Scott-Hansen says. “For financial advisers it’s a huge differentiator. They can have a much more precise, and incredibly accurate, view of risk.”
But even as BlackRock pushes into the wealth management arena, it’s not pulling back from efforts to continue winning over institutional investors.
“The reality is we have very few clients relative to the number of opportunities in the world,” Goldstein says. “We’re just getting started.”