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BlackRock: Strategic Initiatives amid Slowing Alpha Returns

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Part 5
BlackRock: Strategic Initiatives amid Slowing Alpha Returns PART 5 OF 10

BlackRock Expenses Stable on Marketing and Technology Spending

Augmenting margins

BlackRock (BLK) has consistently improved its operating margins in the range of 42%–46% by cutting down on administrative and other expenses, achieving economies of scale, deploying technology for operations, and trading. In 2Q17, BlackRock (BLK) reported 6% growth in total revenue. Its operating expenses also rose 6%, resulting in similar growth in operating income. The company’s expenses rose to $1.24 billion in 2Q17 versus $1.17 billion in 2Q16, mainly due to a rise in compensation, direct fund expense, and general spending.

BlackRock Expenses Stable on Marketing and Technology Spending

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On a year-over-year basis, BlackRock’s adjusted operating margin rose by 10 basis points to 41.9%, reflecting an industry-wide trend of expense cutting. Overall, the broad markets (SPX-INDEX)(SPY) rose in 2016 and 1H17, resulting in improved performance income for fund providers. This change has led to higher compensation and employee expenses for fund managers and direct fund expenses for distributors. Other managers, including JPMorgan Chase (JPM), State Street (STT), and Bank of New York Mellon (BK) posted operating margins in the range of 30%–40%.

General, fund, distribution, employee increases

In 2Q17, BlackRock’s general expenses rose $69 million from 2Q16, mainly due to higher employee expenses as well as direct fund, general, and distribution expenses.

The company’s compensation expenses rose $22 million to $1 billion in 2Q17 on higher funds under management and improved performance income. The company’s direct fund expenses rose by $29 million to $224 million, and general expenses rose by $34 million to $350 million. General expenses rose on portfolio services, technology, marketing and promotional expenses, and foreign exchange remeasurement expenses.

Lower performance fees in 2Q17 suggest difficulty in generating alpha returns for active asset managers. Investors seem to prefer low-cost ETFs amid declining premium returns from active offerings.

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