Does the gold market’s turmoil affect State Street?
Gold ETFs form roughly a sixth of State Street's ETF investments – which should translate to just above 1% of the company's share value.
Precious metals have also been viewed as a hedge to the unprecedented quantitative easing among central banks globally in recent years. But the myth that gold prices can only go up was shattered rather rudely last month when gold prices sank more than 15% within two trading days. Although prices have recovered since then, the demand for gold remains soft among investors, something that is reflected in the recent outflows from gold exchange traded funds (ETFs).
SPDR Gold Trust, distributed by State Street (STT), is the largest gold ETF in the world with about $50 billion in assets under management. BlackRock's (BLK) iShares Gold Trust comes in at a distant second with $10 billion in assets. And the impact of the weak outlook for gold on these funds can be easily understood by the fact that SPDR Gold Trust assets were worth more than $60 billion in the first week of April – signifying a 17% decline over a one month period. But what does this decline mean for State Street's overall share value?
We maintain a $61 price estimate for State Street's stock, which is slightly ahead of the current market price.
State Street is the second largest custody bank in the world after BNY Mellon (BK), and is also the second largest provider of ETFs after BlackRock (BLK). A glance at the chart below shows State Street's primary source of value comes from its services as a custodian with the asset management roles contributing to less than 10% of the total estimate value. Once that is understood, however, it is important to see that ETFs are the biggest source of value among the asset management services provided by State Street, representing more than 6% of the share value.
Now not all of State Street's ETF offerings come under the SPDR Gold Fund. In fact, the gold ETFs themselves form a small fraction of the total assets managed by the company under ETFs. To put things in perspective, State Street had $354 billion in assets invested in its various ETF offerings at the end of Q1 2013, of which the SPDR Gold Fund held $63 billion. So gold ETFs form roughly a sixth of State Street's ETF investments – which should translate to just above 1% of the company's share value.
That's right. State Street's extremely popular SPDR Gold Fund forms a really small fraction of what the company is worth -- and even if all the assets under this fund are eliminated, the impact on the share price is negligible (something that can be verified by making changes to the chart below). But that is not to say that the business is unimportant because as a standalone unit, it adds more value than any of State Street's equity, debt or even money market investment options. And it is also the only investment class in which State Street ranks way above BlackRock in investor preference.
To sum it up, the dipping popularity of gold is no doubt cutting into profits of State Street's SPDR Gold Fund. But the impact on the overall company is negligible, if anything, thanks to the diversified nature of State Street's financial service offerings.
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