) surprised investors last week by beating already high
expectations with a record performance for the last quarter of
2013. The global asset management leader continued to cash in on
the growing demand for ETFs among retail as well as institutional
investors through its popular iShares offerings. The results also
received a boost from a notable increase in the demand for fixed
income investment options over Q4 thanks to the impending changes
in the U.S. interest rate environment.
The largely positive market conditions across the globe over the
quarter also played a role in helping BlackRock's long-term assets
under management (AUM) past the $4-trillion mark for the first
time. Inflows of $40.5 billion were complemented by net market
appreciations of just under $160 billion to help the company churn
out record fee revenues of $2.3 billion for the period. Including
cash management and advisory assets, BlackRock's total AUM at the
end of the year was $4.32 trillion.
A visible increase in the size of actively-managed as well as
high-risk investment options, which hold higher revenue potential,
among other factors have led us to raise our price estimate for
BlackRock's stock from $296 to $330
. The revised price is about 5% ahead of current market prices.
See our full analysis for BlackRock
The Asset Base Showed Several Positive Trends
A quick glance through BlackRock's asset base under various
categories shows an encouraging fact: the growth was driven across
asset classes, not just mostly from iShares as has been witnessed
for several quarters now. There was net positive growth for each of
the asset classes - equities, fixed-income, multi-asset and
alternatives. More importantly, the multi-asset class and core
alternatives showed the most quarter-on-quarter growth (10.7% and
16.9% respectively) - highlighting the shifting risk preference
among investors. The conclusion that investors' risk appetite seems
to be growing is good news for the asset manager as this indicates
higher revenue potential from its offerings over the future.
Also, there was a healthy growth in the size of assets for
active equity funds (6.6%) which presents another upside to
BlackRock's value. This is because equity-based funds present a
higher revenue potential than their fixed income counterparts both
in terms of management fees as well as performance fees, just as
actively-managed funds earn more fees than passive ones. To put
things in perspective, BlackRock's fee revenue as a percentage of
assets in actively-managed equity funds (~0.58%) is 10 times that
for passively-managed fixed-income funds (~0.058%).
Operating Margins Also Moving In The Right
Early last year, we detailed the importance of cutting costs for
BlackRock to ensure profitability as it moves towards the retail
investor market (
Here's Why BlackRock Strikes The Right Note With Its Cost-Cutting
). 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.
BlackRock has been working to cut costs in the last few
quarters, shifting things around in units that have been laggards
of late to get them back in shape (see BlackRock Looks To
Steady Its Flagging Active Equity Business). And over the last
quarter it also rejigged its European ETF business to get rid of
redundancies introduced by its acquisition of Credit Suisse's ETF
unit (see BlackRock Consolidates European ETF Offerings After
Credit Suisse Deal)
These efforts have made a tangible impact on the bottom line
over recent quarters. Although BlackRock reported operating
expenses of $1.6 billion for Q4 - 9% higher than the figure for Q3
- most of this increase comes from higher compensation fees for a
very profitable quarter as revenues grew by 12% this quarter. So
overall the operating margins improved from 39% in Q3 2013 as well
as Q4 2012 to cross 40% for the first time ever in Q4 2013.
BlackRock's share price is very sensitive to its operating
expenses - something that can be best understood by making changes
to the chart below.
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