Blackrock’s ETF Popularity Hauls In Record Fee Revenues

There is no denying BlackRock’s (NYSE:BLK) strong presence in the global asset management industry especially its stronghold on exchange-traded fund (ETF) offerings where it is the market leader by a wide margin. This lead is thanks to the growing demand for ETFs as an investment option among retail as well as institutional investors that the financial giant successfully caters to through its popular iShares offerings.

With market conditions across the globe remaining firmer for a large part of the second quarter, it is no surprise that BlackRock churned out record fee revenues of $2.2 billion for the period. And the strong inflows the company witnessed over the quarter also boosted the size of its assets under management (AUM) to $3.86 trillion – a good 8% improvement over the $3.56 trillion figure at the end of the previous quarter.

And there’s more good news on the cost front too as total expenses when adjusted for $139 million in one-time costs fell enough for BlackRock to report an adjusted operating margin of 41.3% – better than the 40% figure for the same quarter last year as well as the 39.2% reported in Q1 2013.

Better than expected fees pocketed by BlackRock across its operating units coupled with improving margins thanks to its focus on cutting costs present a higher earnings potential for the company in the future. Consequently, we have raised our price estimate for BlackRock’s stock from $267 to $283.

See our full analysis for BlackRock

BlackRock’s Cost-Cutting Plan Begins To Show Results

Earlier this year, we detailed the importance of cutting costs for BlackRock to ensure profitability as it moves towards the retail investor market in our article Here’s Why BlackRock Strikes The Right Note With Its Cost-Cutting Plan. This is because the largely untapped retail investor market is heavily influenced by the price of the products offered – requiring BlackRock to keep its fees from these products low. Profit under such circumstances are only possible  if operating costs are shrunk as low as possible.

The fact that BlackRock is doing everything to get its ship in order is definitely in the best interest of the organization, as well as the investors. The company is also shifting things around in units that have been laggards over the recent quarters to get them back in shape (see BlackRock Looks To Steady Its Flagging Active Equity Business).

And the efforts are beginning to make a tangible impact on the bottom line. Removing the $124 million in costs the company incurred from charitable contributions this quarter, BlackRock’s total expenses for the period were just above $1.5 billion – about 2% below the figure for Q1 2013. Any cost-cutting measure presents a considerable upside to BlackRock’s shares due to the sensitivity of its value to its operating expenses – something that can be best understood by making changes to the chart below.

The Popularity of iShares Is Translating Into Higher Fee Revenues

Since BlackRock acquired iShares from the erstwhile Barclays Global Investors in late 2009, the offering has seen the fastest growth among all the investment products the company has to offer. Although the actual size of assets under management shrunk this quarter due to the reductions in value of securities given the turmoil stemming from interest rate uncertainty towards the end of the quarter, the shifting preference between equity and debt offerings among investors helped BlackRock pocket record fees this time around.

The fee revenue from equity iShares have seen the biggest jump over the quarter, generating $584 million in revenues in Q2 2013 – 2% higher than the $571 million figure for Q1 2013 and a good 25% more than the $467 million in Q2 2012.

This is a good trend for BlackRock in the long run, as equity-based funds present a higher revenue potential than their fixed-income counterparts both in terms of management fees as well as performance fees.

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