BlackRock Sees Better Third Quarter

ETF powerhouse BlackRock (NYSE:BLK) announced third quarter business results showing record fully diluted, adjusted earnings per share of $3.47, up 23 percent from the third quarter of 2011 and up 12 percent from the second quarter of 2012. Assets under management (AUM) increased by 10 percent compared to the third quarter of 2011 to $3,673 billion. The adjusted operating margin for the third quarter increased to a record 40.7 percent.

BlackRock reported long-term net inflows of $31.3 billion during the third quarter. Management notes that this figure excludes a single, low-fee, institutional index fixed income outflow of $74.2 billion, which BlackRock declined to re-bid at extremely low fees, the quarterly earnings release stated.

Retail and high net worth investors favored income-oriented products such as high-yield bond funds. Commenting on the net inflow of $3.5 billion of AUM in the retail business, Lawrence D. Fink, BlackRock's Chairman and CEO said in a statement accompanying the earnings release, As retirement trends accelerate and assets continue to shift from defined benefit to defined contribution plans, the appetite for broader investment solutions continues to increase.

The company's flagship iShares business saw net inflows of $25.2 billion during the third quarter of which $20.5 billion flowed into equity funds. The bulk of these inflows went into U.S. equity funds but BlackRock also reported that there were net inflows into emerging market and pan-European equity funds during the third quarter.

On the institutional side of the business, actively managed AUM increased by a net $30.7 billion, up four percent from 2011, but this is made up of performance gains ($31.9 billion) and the acquisition of $6.2 billion in assets from the purchase of Swiss Re Private Equity Partners. Multi-class products saw an inflow of $3.1 billion but equities saw outflows of $5.0 billion, alternatives outflow was $2.9 billion and outflows from fixed income were $2.6 billion, which the company attributed to changes in asset allocation. Institutional index products saw net inflows of $8.8 billion and foreign exchange valuation gains of $72.7 billion as the U.S. dollar weakened during the quarter.

The BlackRock Solutions business, which provides risk analytics services and systems to institutional investors, saw revenue increase by 9.4 percent over the third quarter of 2011 due to a net increase of 18 new assignments during the third quarter of 2012.

BlackRock is currently engaged in a battle for market share against ETF rivals Vanguard and State Street Bank. The company recently announced that it is cutting fees in an effort to capture a larger share of the buy-and-hold retail investment market. This has been covered in detail by The ETF Professor.

As the Professor explains, it is not just about fees. Performance matters too.

Anyone who has watched television over the past couple of weeks has probably noticed that BlackRock has launched a major advertising campaign aimed at the retail investor. The company is seeking to enhance its brand image, not only for iShares but also to get retail investors to directly invest in BlackRock funds or to ask for BlackRock products from their investment advisors.

BlackRock has made some strategic marketing hires and we are likely to see more aggressive advertising from the company in the months ahead as the largest fund management company in the United States seeks to become a household name. It will be interesting to see if this will enhance AUM growth in the fourth quarter and into 2013. BlackRock shares are trading up about 0.5 percent following the results announcement.