BlackRock (BLK) is targeting economies of scale amid higher technology investments and improved operating efficiencies. The company has garnered operating margins in the range of 42%–45% over the past six quarters. It has been successful in expanding its operating margin via the deployment of technology, platform investments, and lower administrative spending.
BlackRock posted a margin of 44.8% in 4Q17, higher than its margin of 44.5% last year, aided by strong expense management and higher margins on various products. This figure is expected to remain stable in 2018 as new fund flows are expected to gain pace at a slightly slower rate than in 2017 on valuation and interest rate concerns.
BlackRock spent ~$2.0 billion in 4Q17, a rise of 19% from the previous year on higher compensation, direct fund expenses, distribution expenses, and general spending. In comparison, its revenue rose 20% during the same period. Passive fund offerings have seen a stabilization of fees in recent quarters, allowing for revenue expansion in upcoming quarters. Asset managers (VFH) including Goldman Sachs (GS), Charles Schwab (SCHW), JPMorgan Chase (JPM), and Blackstone (BX) are competing on returns, technology, and product variety.
Rise in general spending
Asset managers and financial institutions are continuing with their expense management programs in spite of a substantial jump in overall operating performance in recent years. They have kept a tab on administrative spending partially offset by technology spending to improve their economies of scale and efficiencies.
BlackRock’s spending also increased due to technology investments and higher professional and portfolio services. The company’s compensation jumped by $160.0 million to ~$1.1 billion due to an increase in its number of employees and improved performance fees.
In 2018, BlackRock could maintain its margins in the range of 42%–45% despite relatively low equity returns. The company could benefit from debt inflows, hedge funds, and real estate product offerings in the United States, Europe, and Asia.