Strong Growth Across Asset Classes Fuels BlackRock’s Q1 Results

BlackRock (NYSE:BLK) surprised investors late last week by announcing a better-than-expected performance for the first quarter of the year. ^[1] Although revenues for the global asset management leader were 4% lower than the record levels seen in the previous quarter, there was a quarter-on-quarter increase in each of its long-term investment asset classes except for active equity funds, which saw a marginal decline. Fixed-income funds led the growth in its asset base, with gains of more than 5% – likely due to the expected improvement in the country’s interest rate environment.

BlackRock ended the quarter with long-term assets under management (AUM) of just over $4.1 trillion, while its total asset base reached an unprecedented $4.4 trillion. Inflows and net market appreciation for the quarter were $26.7 billion and $62.6 billion, respectively, compared to $40.5 billion and $160 billion in Q4 2013. This dragged down BlackRock’s performance-related fee revenues from $268 million in Q4 2013 to $158 million in Q1 2014. It should be noted, however, that the previous quarter came on the heels of two quarters which saw weak investment activity globally due to interest rate uncertainty.

We maintain a $333 price estimate for BlackRock’s stock, which is is about 10% ahead of the current market price.

See our full analysis for BlackRock

Passive Funds, iShares Generate Most Interest

A glance at BlackRock’s asset base shows a trend we pointed out last quarter – growth was driven across asset classes, not just from iShares as has been witnessed for most quarters since late 2009. There was net positive growth for each of the major asset classes – equities, fixed-income, multi-asset and alternatives. Institutional index (or passively-managed) fixed-income funds showed the most quarter-on-quarter growth of 6% – highlighting the improving market sentiments towards debt securities.

ETFs also grew at a brisk pace, with investors preferring fixed-income iShares in Q1. Assets in these iShares increased by 5% over the quarter, bringing the total iShares assets under management to $930 billion. Also, multi-asset and alternative investment options added more than 3.5% in assets indicating that investors’ risk appetite continues to grow. This is good news for BlackRock as it points to higher revenue potential from its offerings in the future.

BlackRock Is Keeping A Close Eye On Expenses

We have detailed the importance of cutting costs for BlackRock on several occasions in the past, especially given its shifting focus on the retail investor market. 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.

For its part, BlackRock has worked diligently to cut operating in the last few quarters. These efforts have made a tangible impact on the bottom line over recent quarters. BlackRock reported operating expenses of $1.6 billion in Q1 2014, which was the same as in Q4 2013, but this figure is 5% higher than that for Q1 2013. However, the entire difference can be traced back to higher compensation fees for a very profitable quarter, indicating an improvement in margins compared to the same period last year. Also, there has been a meaningful reduction in BlackRock’s general & administrative costs in Q1 2014.

The table below shows the overall improvement in non-interest expenses (as a percentage of revenue) for BlackRock over the last three years. While expenses are likely to grow in the future given BlackRock’s plans to expand its operations geographically, we believe that revenue growth will outpace the rate at which expenses will grow over coming years. This will result in a steady improvement in operating margins for the company.

As you can see by making changes to the chart below, which represents BlackRock’s actual and forecast operating margins, an increase of just two percentage points in margin figures by the end of our forecast period would push our price estimate up by more than 5%.

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1. 1Q14 Press Release, BlackRock Investor Relations, Apr 17 2013 [↩]