Last updated: June 8, 2009 8:10 pm

BlackRock / Barclays Global Investors

Buy assets, cut costs, rinse and repeat. BlackRock’s desire to grab Barclays Global Investors to create a mammoth fund manager with some $2,800bn in assets feels familiar. In 2006, the then rather low-profile bond manager doubled its size with the purchase of Merrill Lynch Investment Management, adding the investment bank to its shareholder register. The BGI deal could reportedly see BlackRock’s current $1,300bn asset pool multiply once again – and bring Barclays, along with a Middle Eastern investor group, into the fold.

BlackRock, then, has form in executing big deals – and the mooted price of $13bn, less than 1 per cent of BGI’s assets under management, looks reasonable. BlackRock can gobble up BGI’s $230bn-odd of actively managed assets and a deal would further beef up its equities business and non-US presence. More importantly, with 70 per cent-plus of BGI’s assets in passive strategies, BlackRock would at a stroke acquire heft in a part of the market increasingly in demand. Much of the talent at BGI comes in computer form, so retaining the stars of the business – one obstacle in such deals – is perhaps less of a headache. And the pair have a similar cost income ratio, at about 70 per cent last year. But one would expect BGI to be more efficient given its focus on lower-cost passive strategies. That suggests there may too be scope to trim costs in the actively managed part of BGI.

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Two challenges loom. The first is to reconcile passive devotees and those at the other end of the investment spectrum who still believe fund managers can beat the market. The second hurdle is more prosaic. Asset management deals tend to occur when a rising market tide makes it easier to impress. If this rally proves a false start, repeating BlackRock’s previous trick will be far tougher.

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