BlackRock’s Record Q3 Driven By Strong Performance Fees As iShares Dominate The ETF Market

by Trefis Team
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BlackRock (NYSE:BLK) managed to beat Q3 revenue and income expectations by a considerable margin on Wednesday, October 11, as the world’s largest asset manager continued to cash in on the growing popularity of ETFs globally to report its best ever quarterly performance. Strong inflows for most of its fund offerings coupled with the ongoing rally in global equity markets helped BlackRock’s total assets under management (AUM) swell to just under $6 trillion at the end of the period – a 5% sequential increase in the figure and a 17% jump year-on-year.

Notably, BlackRock did well over the quarter to report net inflows into its actively-managed funds for the period – reversing the trend of several quarters of net outflows for these offerings. BlackRock had been focused on reviving its active fund business over recent months by relying more on computers to pick stocks by identifying equity market trends, and the efforts seem to be bearing fruit as the company’s scientific active equity group saw its asset base swelling considerably.While the sharp revenue growth was accompanied by a sizable increase in operating expenses, BlackRock continues to enjoy significant economies of scale compared to its competitors thanks to huge asset base as well as its diversified geographical presence. This is reflected in an overall improvement in operating margins for the company – a trend we believe will continue despite industry headwinds, including ETF price wars and the ongoing trend of investors shifting cash from high-fee active funds to low-cost ETFs.

In view of the better-than-expected growth in iShares as well as active fund assets, and the noticeable improvement in profit margins, we revised our price estimate for BlackRock’s shares upwards from $440 to $475.

See our full analysis for BlackRock

The table above summarizes the factors that aided BlackRock’s pre-tax profit figure for Q3 2017 compared to the figures in Q3 2016 and Q2 2017. Strong improvements in valuation, coupled with extremely strong inflows across asset classes, helped BlackRock’s investment advisory fees increase to an all-time high of nearly $2.79 billion for the period – up from $2.67 billion in the previous quarter and $2.55 billion a year ago. At the same time, strong performance fees generated by the company’s alternative investment funds for the quarter helped its performance-related fees jump to $191 million for the quarter – the highest since Q3 2015.

BlackRock’s growing asset base understandably led to an increase in headcount for the period, which led to an increase in compensation expenses for the period along with higher performance-linked payouts. The modest increase in other operating expenses is from higher direct fund expenses and higher general and administration costs. Overall, BlackRock’s operating margin (adjusted basis) figure of 45% for Q3 2017 was slightly higher than the Q3 2016 figure of 44.8% and much better than the 43.9% figure for the previous quarter. You can see how changes to BlackRock’s operating margin affects our price estimate by modifying the chart below.

Cash Continues To Pour Into BlackRock’s Funds

BlackRock offers a complete range of investment products, including actively-managed as well as passively-managed (indexed) equity and fixed income funds, ETFs (iShares) and multi-class asset funds, in addition to currency, commodities, and other alternative investment funds. The company witnessed strong inflows for most of its fund classes over Q3 2017, with its long-term funds roping in $73.8 billion in net new cash. This figure is below the record inflows of $93.5 billion for the previous quarter, as BlackRock’s indexed equity funds reported outflows of $18.2 billion for the quarter.

Inflows continued to be led by BlackRock’s popular iShares offerings, which reported net inflows of $52.3 billion. Equity iShares added $33.1 billion, followed by fixed income iShares with $17.5 billion. The asset classes which witnessed net outflows were the company’s non-ETF equity and alternative funds.

The chart below captures the proportion of BlackRock’s assets under management distributed across its various offerings. Notably, BlackRock’s iShares offerings now account for 27% of its total asset base, compared to a figure of around 23% a year ago. At the same time, actively-managed funds are now down to 18% of total AUM from over 21% a year ago.

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