Report
EUR 850.00
For Business Accounts Only
Net long-term inflows of $43.6 billion during the fourth quarter (driven by a record $81.4 billion in iShares exchange-traded funds inflows) were impressive, given all the volatility in the markets, but were still off the $62.2 billion quarterly run rate we'd seen from BlackRock the prior eight calendar quarters. That said, absent several large outflows the firm saw from institutional index investors, inflows would have been closer to that quarterly run rate. Full-year organic growth of 2.1% came in at the lower end of our forecast range of 2%-3% for 2018 and represented the firm's weakest year of organic growth since 2012.
Average long-term AUM growth of 0.8% during the fourth quarter translated into a 4.1% decline in base fee revenue growth, as mix shift and fee compression weighed on results. Total revenue was down 8.8% when compared with the prior year's quarter but increased 4.4% on a full-year basis (at the lower end of our forecast for mid-single-digit revenue growth). BlackRock posted a 30-basis-point increase in full-year operating margins to 38.9% on an adjusted basis when compared with the year-ago period, leaving it just below our 39%-40% target for 2018.
Looking more closely at BlackRock's flows, total equity inflows of $28.3 billion during the fourth quarter were driven by $60.5 billion in positive flows from its iShares ETF operations, offset by outflows from both its active ($1.3 billion) and institutional ($30.9 billion) platforms. Even with the sell-off in the equity markets during the fourth quarter, equities remained BlackRock's largest asset class category, accounting for 51% of companywide AUM--spread across its active (4%), institutional index (25%), and iShares (21%) platforms. While the institutional outflows were less impactful to fourth-quarter results, given that the base fees for those index-based assets are around 4 basis points, they do serve as a reminder that these assets can move in large chunks when investment mandates and allocations shift during the course of a year.
Given the meaningfully higher fees BlackRock charges for its active equity operations (55 basis points relative to 24 basis points for iShares equity offerings), we've always noted that any improvement in this part of its business would be beneficial to base fee growth longer term. BlackRock closed out the December quarter with 50%, 67%, and 78% of fundamental equity funds above their benchmarks or peer medians on a one-, three-, and five-year basis, respectively, compared with 70%, 72%, and 73% at the end of the fourth quarter of 2017, leaving the company room for improvement. Actively managed systematic equity funds, which have been putting up better numbers historically, also stumbled in the near term with 32%, 83%, and 93% of AUM beating their benchmark or peer median on a one-, three- and five-year basis, respectively, at the end of 2018 (compared with 83%, 87%, and 90% outperforming at the end of 2017).
The key to getting and keeping flows positive in BlackRock's active equity operations will require the company's three- and five-year performance results consistently being in the upper quartile. While the company continues to get closer to doing that on a sustained basis, positive flows may still be more difficult than in past periods, especially with the gatekeepers for retail-advised platforms placing a much greater focus on active managers' fees and investment performance when selecting funds for their platforms. That said, we were impressed that the company saw just $1.3 billion in outflows during the fourth quarter, given the quarterly run rate of $4.3 billion in outflows we'd seen from these operations during the prior eight calendar quarters.
BlackRock's fixed-income platform (which accounted for 32% of AUM at the end of December) was also affected by increased volatility during the fourth quarter, with inflows of $3.1 billion driven by $18.9 billion and $5.0 billion in inflows into BlackRock's institutional index funds and iShares ETFs, respectively. These were, however, offset by $20.8 billion in outflows from actively managed products. Slightly weaker near-term investment performance on the active side (which accounts for 13% of companywide AUM) could pose a risk to future flows, though, with 48%, 69%, and 82% of taxable fixed-income funds above the benchmark or peer median on a one-, three-, and five-year basis, respectively, at the end of the fourth quarter, compared with 81%, 73%, and 90% outperforming in the year-ago period. Tax-exempt fund offerings were also struggling, with 47%, 71%, and 76% of active funds beating their benchmark or peer median on a one-, three-, and five-year basis, respectively, at the end of December, compared with 52%, 68%, and 72% at the end of 2017.
We expect iShares fixed-income operations (which accounted for 7% of companywide AUM at the end of the fourth quarter) to continue to grow at a somewhat faster rate organically than the equity iShares platform, primarily because equity ETFs already account for more than three fourths of the global ETF market (compared with fixed-income ETFs at less than 20%) and more and more institutional and retail investors are looking to ETFs to meet fixed-income exposure needs. We also expect iShares, which has generated around $1 trillion in inflows for BlackRock since the company closed the deal to buy Barclays Global Investors in late 2009, to continue to be the primary driver of organic growth for the company. Our current projections have the global ETF market (which stood at $4.8 trillion at the end of 2018) to grow organically at a high-single- to double-digit annual rate during the next five-plus years, with BlackRock maintaining market leadership both domestically (40%) and globally (37%).
This should, assuming low- to mid-single-digit market gains on average, allow the market to nearly double over the next five years--but this will still end up below management's projection for the global ETF market to reach $10 trillion-$12 trillion in AUM by the end of 2023. While BlackRock has seen stiff pricing competition in the past from Vanguard (which currently holds 25% of the U.S. ETF market and 19% of the global market) and Schwab (with more than 3% market share domestically and less than 3% share globally), it has held its market share steady for six years now and has been capturing a greater percentage of the industry's flows.
BlackRock's total net inflows of $167.5 billion during 2018 with its iShares ETF platform were not only once again greater than Vanguard's (estimated inflows of $86.3 billion) but were greater than its five largest competitors--Vanguard, State Street/SSgA, Invesco, Nomura, and Schwab--combined. This left organic growth for BlackRock's ETF operations at around 9.4%, compared with our estimate of 9.6% for Vanguard. Over the past five years, we've seen the organic growth rate at Vanguard come down closer to BlackRock's rate (which has tended to mirror the industry as a whole). This is expected, given the expansion of Vanguard's ETF operations and the fact that pricing has stabilized somewhat in the industry (as fee rates for large plain-vanilla index-based products have gotten closer and closer to zero).
As for profitability, which is the other key item that investors tend to focus on when valuing the asset managers, BlackRock posted a 30-basis-point increase in full-year operating margins during 2018. Full-year adjusted operating margins of 38.9% did, however, exclude the impact of a $60 million restructuring charge that the company took to cover severance and other compensation related costs tied to layoffs in some of its slower-growing units, as well as the elimination of redundant positions, using the savings from these efforts to spend on technology and invest in business lines with better growth prospects. As BlackRock grows, and the markets get more volatile, the company will need to continue to make tough decisions about where its resources will be allocated.
Focusing maximum efforts and resources on businesses that are not only growing today but have the capacity to continue growing (like ETFs or technology offerings like Aladdin) makes more sense than spending time and capital on areas facing significant headwinds (like core active equities). After all, the long-term goal is to keep what we expect to be industrywide fee and margin compression from affecting the company's own profitability too much. At this point, BlackRock continues to be the only U.S.-based asset manager we cover where we forecast a slight expansion in operating margins over the next 5-10 years (with the best-case scenario for the group overall being flat margins over the same time frame). The increased scale of BlackRock's ETF operations over time, as well as the efficiencies and product opportunities created by ongoing technology investments, should allow the company to buck the trend of margin compression we envision for the industry as a whole.
As for capital allocation, BlackRock spent $693 million on two acquisitions last year: $393 million for Tennenbaum Capital Partners, a middle-market credit and special situation credit opportunities manager (with about $9 billion in AUM at the end of 2017), and $360 million for Citibanamex's asset management business (with some $34 billion in fixed-income, equity, and multi-asset AUM at the end of August 2018). While the company also committed additional capital to seed investments (which stood at $1.6 billion at the end of the third quarter of 2018), it returned the bulk of the remainder of its free cash flow to shareholders. BlackRock spent $1.7 billion on share repurchases during 2018, reducing its shares outstanding by nearly 3%, and expects to spend at least $1.2 billion (or $300 million per quarter) on share repurchases this year. BlackRock increased its quarterly dividend 15% to $2.88 per share at the start of 2018, and then increased it again during the third quarter to $3.13 per share. Management announced another increase Jan. 16 with its fourth-quarter earnings release, taking the dividend to $3.30 per share (equivalent to a 3.2% dividend yield at today's share price).
Morningstar | Record ETF Inflows Keep BlackRock's 4Q From Falling Too Short; Lowering FVE to $475
While the fourth quarter of 2018 was disruptive for wide-moat-rated BlackRock (and the rest of the U.S.-based asset managers), we're not altering our long-term view but do expect to reduce our fair value estimate to $475 per share. BlackRock closed out the December quarter with $5.976 trillion in managed assets, down 7.3% sequentially and 5.0% year over year, as market losses and adverse currency exchange in the fourth quarter more than offset the positive contribution from $43.6 billion in inflows. While this was only slightly worse than our expectations for $6.035 trillion in assets under management for the end of 2018, management fee rates came in lower than we were envisioning, which affected not only 2018 revenue and earnings but our expectation for future results.Net long-term inflows of $43.6 billion during the fourth quarter (driven by a record $81.4 billion in iShares exchange-traded funds inflows) were impressive, given all the volatility in the markets, but were still off the $62.2 billion quarterly run rate we'd seen from BlackRock the prior eight calendar quarters. That said, absent several large outflows the firm saw from institutional index investors, inflows would have been closer to that quarterly run rate. Full-year organic growth of 2.1% came in at the lower end of our forecast range of 2%-3% for 2018 and represented the firm's weakest year of organic growth since 2012.
Average long-term AUM growth of 0.8% during the fourth quarter translated into a 4.1% decline in base fee revenue growth, as mix shift and fee compression weighed on results. Total revenue was down 8.8% when compared with the prior year's quarter but increased 4.4% on a full-year basis (at the lower end of our forecast for mid-single-digit revenue growth). BlackRock posted a 30-basis-point increase in full-year operating margins to 38.9% on an adjusted basis when compared with the year-ago period, leaving it just below our 39%-40% target for 2018.
Looking more closely at BlackRock's flows, total equity inflows of $28.3 billion during the fourth quarter were driven by $60.5 billion in positive flows from its iShares ETF operations, offset by outflows from both its active ($1.3 billion) and institutional ($30.9 billion) platforms. Even with the sell-off in the equity markets during the fourth quarter, equities remained BlackRock's largest asset class category, accounting for 51% of companywide AUM--spread across its active (4%), institutional index (25%), and iShares (21%) platforms. While the institutional outflows were less impactful to fourth-quarter results, given that the base fees for those index-based assets are around 4 basis points, they do serve as a reminder that these assets can move in large chunks when investment mandates and allocations shift during the course of a year.
Given the meaningfully higher fees BlackRock charges for its active equity operations (55 basis points relative to 24 basis points for iShares equity offerings), we've always noted that any improvement in this part of its business would be beneficial to base fee growth longer term. BlackRock closed out the December quarter with 50%, 67%, and 78% of fundamental equity funds above their benchmarks or peer medians on a one-, three-, and five-year basis, respectively, compared with 70%, 72%, and 73% at the end of the fourth quarter of 2017, leaving the company room for improvement. Actively managed systematic equity funds, which have been putting up better numbers historically, also stumbled in the near term with 32%, 83%, and 93% of AUM beating their benchmark or peer median on a one-, three- and five-year basis, respectively, at the end of 2018 (compared with 83%, 87%, and 90% outperforming at the end of 2017).
The key to getting and keeping flows positive in BlackRock's active equity operations will require the company's three- and five-year performance results consistently being in the upper quartile. While the company continues to get closer to doing that on a sustained basis, positive flows may still be more difficult than in past periods, especially with the gatekeepers for retail-advised platforms placing a much greater focus on active managers' fees and investment performance when selecting funds for their platforms. That said, we were impressed that the company saw just $1.3 billion in outflows during the fourth quarter, given the quarterly run rate of $4.3 billion in outflows we'd seen from these operations during the prior eight calendar quarters.
BlackRock's fixed-income platform (which accounted for 32% of AUM at the end of December) was also affected by increased volatility during the fourth quarter, with inflows of $3.1 billion driven by $18.9 billion and $5.0 billion in inflows into BlackRock's institutional index funds and iShares ETFs, respectively. These were, however, offset by $20.8 billion in outflows from actively managed products. Slightly weaker near-term investment performance on the active side (which accounts for 13% of companywide AUM) could pose a risk to future flows, though, with 48%, 69%, and 82% of taxable fixed-income funds above the benchmark or peer median on a one-, three-, and five-year basis, respectively, at the end of the fourth quarter, compared with 81%, 73%, and 90% outperforming in the year-ago period. Tax-exempt fund offerings were also struggling, with 47%, 71%, and 76% of active funds beating their benchmark or peer median on a one-, three-, and five-year basis, respectively, at the end of December, compared with 52%, 68%, and 72% at the end of 2017.
We expect iShares fixed-income operations (which accounted for 7% of companywide AUM at the end of the fourth quarter) to continue to grow at a somewhat faster rate organically than the equity iShares platform, primarily because equity ETFs already account for more than three fourths of the global ETF market (compared with fixed-income ETFs at less than 20%) and more and more institutional and retail investors are looking to ETFs to meet fixed-income exposure needs. We also expect iShares, which has generated around $1 trillion in inflows for BlackRock since the company closed the deal to buy Barclays Global Investors in late 2009, to continue to be the primary driver of organic growth for the company. Our current projections have the global ETF market (which stood at $4.8 trillion at the end of 2018) to grow organically at a high-single- to double-digit annual rate during the next five-plus years, with BlackRock maintaining market leadership both domestically (40%) and globally (37%).
This should, assuming low- to mid-single-digit market gains on average, allow the market to nearly double over the next five years--but this will still end up below management's projection for the global ETF market to reach $10 trillion-$12 trillion in AUM by the end of 2023. While BlackRock has seen stiff pricing competition in the past from Vanguard (which currently holds 25% of the U.S. ETF market and 19% of the global market) and Schwab (with more than 3% market share domestically and less than 3% share globally), it has held its market share steady for six years now and has been capturing a greater percentage of the industry's flows.
BlackRock's total net inflows of $167.5 billion during 2018 with its iShares ETF platform were not only once again greater than Vanguard's (estimated inflows of $86.3 billion) but were greater than its five largest competitors--Vanguard, State Street/SSgA, Invesco, Nomura, and Schwab--combined. This left organic growth for BlackRock's ETF operations at around 9.4%, compared with our estimate of 9.6% for Vanguard. Over the past five years, we've seen the organic growth rate at Vanguard come down closer to BlackRock's rate (which has tended to mirror the industry as a whole). This is expected, given the expansion of Vanguard's ETF operations and the fact that pricing has stabilized somewhat in the industry (as fee rates for large plain-vanilla index-based products have gotten closer and closer to zero).
As for profitability, which is the other key item that investors tend to focus on when valuing the asset managers, BlackRock posted a 30-basis-point increase in full-year operating margins during 2018. Full-year adjusted operating margins of 38.9% did, however, exclude the impact of a $60 million restructuring charge that the company took to cover severance and other compensation related costs tied to layoffs in some of its slower-growing units, as well as the elimination of redundant positions, using the savings from these efforts to spend on technology and invest in business lines with better growth prospects. As BlackRock grows, and the markets get more volatile, the company will need to continue to make tough decisions about where its resources will be allocated.
Focusing maximum efforts and resources on businesses that are not only growing today but have the capacity to continue growing (like ETFs or technology offerings like Aladdin) makes more sense than spending time and capital on areas facing significant headwinds (like core active equities). After all, the long-term goal is to keep what we expect to be industrywide fee and margin compression from affecting the company's own profitability too much. At this point, BlackRock continues to be the only U.S.-based asset manager we cover where we forecast a slight expansion in operating margins over the next 5-10 years (with the best-case scenario for the group overall being flat margins over the same time frame). The increased scale of BlackRock's ETF operations over time, as well as the efficiencies and product opportunities created by ongoing technology investments, should allow the company to buck the trend of margin compression we envision for the industry as a whole.
As for capital allocation, BlackRock spent $693 million on two acquisitions last year: $393 million for Tennenbaum Capital Partners, a middle-market credit and special situation credit opportunities manager (with about $9 billion in AUM at the end of 2017), and $360 million for Citibanamex's asset management business (with some $34 billion in fixed-income, equity, and multi-asset AUM at the end of August 2018). While the company also committed additional capital to seed investments (which stood at $1.6 billion at the end of the third quarter of 2018), it returned the bulk of the remainder of its free cash flow to shareholders. BlackRock spent $1.7 billion on share repurchases during 2018, reducing its shares outstanding by nearly 3%, and expects to spend at least $1.2 billion (or $300 million per quarter) on share repurchases this year. BlackRock increased its quarterly dividend 15% to $2.88 per share at the start of 2018, and then increased it again during the third quarter to $3.13 per share. Management announced another increase Jan. 16 with its fourth-quarter earnings release, taking the dividend to $3.30 per share (equivalent to a 3.2% dividend yield at today's share price).
Underlying
BLACKROCK INC.
BlackRock is an investment management firm. The company provides a range of investment and technology services to institutional and retail clients worldwide. Products are provided directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares? exchange-traded funds, separate accounts, collective investment trusts and other pooled investment vehicles. The company also provides technology services, including the investment and risk management technology platform, Aladdin?, Aladdin Wealth, eFront, Cachematrix and FutureAdvisor, as well as advisory services and solutions to a base of institutional and wealth management clients.
Provider
Morningstar
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Greggory Warren
Other Reports on these Companies
Other Reports from Morningstar
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.