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BlackRock: Strategic Initiatives amid Slowing Alpha Returns

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Part 4
BlackRock: Strategic Initiatives amid Slowing Alpha Returns PART 4 OF 10

BlackRock’s Institutional Deployments Reflect Lower Equity Returns

Institutional clientele

BlackRock (BLK) is managing a record $3.17 trillion—about 56% of the company’s total AUM (assets under management) as of June 30, 2017—in its Institutional Clients division. Of this amount, ~$1.08 trillion was in active funds and ~$2.09 trillion was in index funds for its institutional clients. The trends reflect strong demand for index funds among institutional investors, mainly due to lower costs and theme-based investment options.

BlackRock has seen positive flows from institutional investors over the past four quarters, reflecting deployment across product categories.

BlackRock&#8217;s Institutional Deployments Reflect Lower Equity Returns

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In 2Q17, BlackRock’s institutional index attracted flows of $8.7 billion, of which $17.1 billion went toward fixed-income offerings, partially offset by outflows of $8.5 billion in equities. The investments reflect institutional investors’ expected lower returns from equity markets in the coming quarters. The division’s active fund offerings saw inflows of $4.6 billion, led by inflows of $9.5 billion in multi-assets. Mainly due to demand for the LifePath target date series, the division saw $1.7 billion inflows in alternatives. These inflows were partially offset by equity outflows of $4.4 billion.

BlackRock reported an operating margin of 41% in 2016. Other managers posted the following margins.

  • JPMorgan Chase (JPM): 31.6%
  • Bank of New York Mellon (BK): 22.7%
  • State Street (STT): 23.9%

Together, these BlackRock and its above peers form 9.0% of the Vanguard Financials ETF (VFH).

Exiting equities

Institutional investors have poured funds in fixed income, alternatives, and multi-asset categories and withdrew funds from equities in both passive as well as active offerings. These funds reflect lower return expectations from equities in the upcoming quarters, mainly due to high valuations and a slower pace of reforms from Trump administrations.

In 2Q17, the division’s assets under management rose by $118 billion from 1Q17, thanks to positive market changes of $63 billion in equities, long-term inflows of $13 billion, and a favorable foreign exchange impact of $38 billion.

The division’s total base fees rose to $721 million in 2Q17, accounting for 27% of the company’s total fees versus $694 million in 1Q17.

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