BlackRock reported a strong performance for the second quarter of the week on Wednesday, July 15, as marked inflows in the asset management giant’s actively managed fixed income funds helped quarterly revenues cross the $2.9 billion mark for the first time ever in Q2 2015. Investors cheered the results, which followed two consecutive quarters of revenue declines. Notably, BlackRock reported higher advisory and administration fees from every single one of its fund offerings year-on-year. Performance-related fees were lower than what they were a year ago, but were much better than the figures for the previous quarter.
It wasn’t smooth sailing all the way for BlackRock, though, as the company reported net outflows of $7.3 billion for the quarter – the first time it witnessed net outflows from its long-term funds in a quarter since Q3 2012. Valuation was also negatively impacted across asset classes for the period, which wiped out more than $64 billion from BlackRock’s total asset base. Thankfully, favorable exchange rate movements partially mitigated the effects of these two factors on the size of total assets under management – which shrunk from over $4.77 trillion at the end of Q1 2015 to $4.72 trillion now.
We maintain a $385 price estimate for BlackRock’s shares, which is roughly 10% ahead of the current market price.
See our full analysis for BlackRock
Unlike Q1, Assets Haven’t Grown Across Categories
BlackRock offers a complete range of investment products including actively-managed as well as indexed equity and fixed-income funds, ETFs (iShares) and multi-class asset funds in addition to currency, commodities and other alternative investment funds. Q1 2015 was one of the rare periods in which BlackRock reported a quarter-on-quarter increase in assets for every one of these fund offerings thanks to all-around inflows as well as improved market valuations. The trend reversed in Q2 as market-related movements had a net negative impact. Also, BlackRock witnessed heavy outflows from its passively-managed equity funds of $34 billion.
But the cornerstone of BlackRock’s asset base remained its extremely popular iShares ETF offerings. Since BlackRock acquired iShares from Barclays Global Investors in late 2009, the investment product has seen the fastest growth among all that the company has to offer. The company is the undisputed leader in the ETF industry, with its $1 trillion+ asset base representing a market share of nearly 40%. Net inflows across BlackRock’s iShares offerings were $10.3 billion for Q2 2015, with equity iShares responsible for 85% of this figure.
Revenues from iShares (fixed-income and equity combined) reached $866 million for the second quarter – 34% of the $2.5 billion in fund-related fee revenues for BlackRock, and almost 30% of its total revenues of $2.9 billion. A better idea of the importance of iShares in BlackRock’s business model is demonstrated by the fact that this revenue share is achieved despite ETF assets forming less than 24% of the company’s total long-term asset base of $4.44 trillion. Furthermore, the sector holds the most promise in terms of growth potential
Another category where BlackRock did extremely well for a second consecutive quarter was its active fixed income funds, which saw net inflows of $9.1 billion over Q2. This follows inflows of $17.9 billion over Q1. These funds, along with BlackRock’s actively managed equity funds, attract the largest fees as a percentage of assets – making them the company’s most profitable offerings in terms of margins. To put things in perspective, BlackRock’s active fixed income funds have a fee to asset ratio in excess of 0.2% compared to a figure of less than 0.06% for indexed fixed-income funds. The company earned $387 million from active fixed income funds in Q2.
Costs Are On The Rise, But BlackRock Appears To Be In Control Of Things As Of Now
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 set fees for these products low. The company has put in considerable efforts over recent years to rein in costs, and the efforts seem to be paying off as operating margins were at a record high of 42.6% for Q2 2015.
It must be noted that BlackRock’s strong growth in the ETF industry necessitates a larger workforce. The company has done extremely well to report a growth of less than 1% in total operating expenses year-on-year, even as its headcount swelled by almost 7% from 11,600 to 12,400 over the same period.
The chart below captures BlackRock’s historical operating margins as well as our operating margin forecast for the company. While expenses are likely to grow steadily in the future as a result of the company’s plans to expand its operations geographically, we believe that revenue growth will outpace the rate at which expenses grow over coming years. This will result in a steady improvement in operating margins for BlackRock. As you can see by making changes to this chart, 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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