NEW YORK ( TheStreet) -- BlackRock ( BLK) may be poised for rising profits as smarter money enters the stock market, amid expectations that the Dow Jones Industrial Average and the S&P 500 will gain on record highs tested in March. The key for BlackRock -- the world's biggest money manager -- is that as stock indexes test new highs, corporate earnings continue to rise and the likes of Warren Buffett characterize U.S. stock markets as the best place to invest, investors might simply choose to put their money into passively managed mutual funds and exchange traded funds that generally beat actively managed peers. A majority of equity market inflows into funds that replicate the S&P 500 or more specialized indexes targeted at specific sectors, market caps or regions, may indicate the herd of money moving into equity markets in recent months isn't as dumb as some may think. Were passive funds to remain popular with investors moving into rising stock markets, BlackRock may stand to benefit the most. That's because the firm has more than 60% of its client assets in passively managed funds, which grew client assets by 6%, according to a Tuesday client note by David Chiaverini, an analyst with BMO Capital Markets.
The analyst excludes $110 billion in outflow from two of BlackRock's passively managed fixed income funds "We believe passive investments (indexed mutual funds and exchange traded funds) will continue to attract above-average asset flows over the next couple years, with BlackRock benefitting as an industry leader," writes Chiaverini. According to Chiaverini, passively managed funds gained market share as investors moved strongly to stock markets at the end of last year. Overall, passively managed funds made up 26% of fund balances in 2012, with Chiaverini calculating that the figure could rise as high as 50% over the long term. After buying iShares from Barclays ( BCS), BlackRock has grown to become a dominant ETF provider. BlackRock's ETF assets under management have grown by about 17% annually, helping to stem market-share losses from its retail funds business. On a valuation basis, Chiaverini highlights BlackRock as the most attractively valued publicly traded asset manager. "While valuations for asset managers have increased this year with the overall market, we believe the relative valuation for BlackRock still makes it a compelling opportunity for new money." Still, some of the benefit for BlackRock may simply be expectations for continued momentum in stock markets, given valuations that aren't wildly above earnings expectations. For instance, while estimates that Google ( GOOG) could hit $1000 indicate the bubble-like optimism that came before the tech crash over a decade ago, actual price-to-earnings estimates are far below levels seen in previous equity market peaks. Jefferies, which on Tuesday gave Google a $1,000 price target, values the company at a multiple of 11.6 times 2014 operating earnings, ex-cash. The other benefit to BlackRock in gaining market share is the poor performance of actively managed stock mutual funds. According to Morningstar, only 35% of actively managed mutual funds outperformed their respective benchmarks for the one-year period ending 2012, 23% outperformed for the three-year period and 31% for the five year period.
Some analysts see things differently. BernsteinResearch analyst Brad Hintz forecast earlier in March that shares of online brokerage and money market fund manager Schwab ( SCHW) could rise 40% on an increase in fees and fund inflows. All told, BlackRock may be a stong stock pick for investors looking for a way to profit from a growing investor move into passively managed funds. For more on investment ideas for a rising market, see Stocks to Watch in a Growing M&A Tide. -- Written by Antoine Gara in New York Follow @antoinegara