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Why BlackRock Is Bracing for Subdued Equity Performance

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Institutional funds

On March 31, 2017, BlackRock (BLK) was managing a record $3.1 trillion—about 56% of the company’s total AUM (assets under management)—in its Institutional Clients division. Of this amount, ~$1.0 trillion was in active funds, and ~$2.0 trillion was in index funds for its institutional clients.

The asset management giant has seen a rebound in institutional flows over the past three fiscal quarters, with deployment in pure equities, fixed income index funds, and active alternative funds. The company is expected to see higher deployment toward index funds in 2Q17 and 2H17, mainly due to theme-based cost-effective investment options.

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In 1Q17, BlackRock’s institutional index attracted flows of $12.2 billion, of which $9.5 billion went toward fixed income offerings, as compared to $2.4 billion in equities. This deployment reflects institutional investors’ lower expectations from equity markets in coming quarters. The division’s active fund offerings saw outflows of $1 billion, led by outflows in equity and fixed income offerings but partially offset by inflows in multi-assets and alternatives.

BlackRock reported an operating margin of 41% in 2016. Its competitors posted the following margins:

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

Together, these companies account for 8.8% of the Vanguard Financials ETF (VFH).

Sustainable market gains?

The deployment pattern among institutional investors clearly depicts their preference of debt holdings amid high equity valuations, rising broad markets, and the slower pace of deregulation and industry reform promised by the Trump administration. For this reason, the company expects to see more flows toward debt offerings and theme-based investments in coming quarters, as compared to overall index tie-up investments.

In 1Q17, the division’s AUM rose $139 billion, as compared to 1Q16, thanks to positive market changes of $108 billion in equities, long-term inflows of $11 billion, and a favorable foreign exchange impact of $20.4 billion.

The division’s total base fees fell to $694 million in 1Q17, accounting for 27% of the company’s total fees, as compared to $697 million in 4Q16.

For more details on BlackRock, check out Market Realist’s “BlackRock: The Biggest Asset Manager in the World.”

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