One Big Surprise from BlackRock’s Third Quarter Earnings

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It was a mixed bag for BlackRock (NYSE:BLK) in the third quarter, as earnings and revenue were up year over year, but its stock price was trading lower after Friday’s earnings release — likely due to one big surprise.

The world’s largest asset manager saw quarterly net outflows from its long-term funds for the first time since the start of the pandemic in 2020. It’s even more surprising, at least on its face, when you consider that the S&P 500 is up 13% year to date.

Net outflows of $13 billion

BlackRock reported Friday that it had $13 billion in net outflows from its long-term funds, which includes its mutual funds, exchange-traded funds (ETFs) and institutional accounts. Looking back just a year ago to the third quarter of 2022, the firm had $65 billion in net new long-term inflows.

Overall, BlackRock eked out $3 billion in total net inflows, thanks to $15 billion flowing into its money market, short-term bond and cash funds. BlackRock categorizes these as cash management funds as opposed to long-term funds. CEO Laurence Fink said it is a case of investors taking advantage of the high interest rates money markets are paying out while avoiding the widespread uncertainty in the stock market.

“For the first time in nearly two decades, clients are earning a real return in cash and can wait for more policy and market certainty before re-risking. This dynamic weighed on industry and BlackRock third quarter flows,” Fink said in the earnings release.

Taking a closer look at the long-term net outflows, ETFs were the only investment type with inflows, with $28.5 billion coming in during the quarter. Retail funds saw $3.6 billion in outflows, but the biggest drag by far came from institutional investors. Institutional accounts saw $37.6 billion in net outflows in the quarter. The bulk of it came from $49 billion in equity index net outflows, with most of that coming from one international client that had a $19 billion redemption, Chief Financial Officer Martin Small said on the Q3 earnings call.

“So, just in assessing how we’re doing, the conversations with our clients, the momentum we have, we think the flows would have obviously been very positive, but for these re-balancings,” he said.

Revenue and earnings move higher

Flows aside, BlackRock posted revenue and earnings gains in the quarter and increased its assets under management by about 14% year over year to $9.1 trillion. Revenue was up 5% to $4.5 billion, while net income jumped 14% to $1.6 billion or $10.66 per share. Both beat analysts’ consensus estimates.

BlackRock’s revenue gains came from higher investment advisory fees, which are based on asset totals, so the rising stock market provided a boost. BlackRock also saw a 20% increase in Technology Services revenue to $407 million, reflecting higher demand for its Aladdin portfolio management software and other analytics tools.

Despite the solid earnings, BlackRock’s stock price was down almost 2% on Friday as investors were more concerned about the outflows. However, Fink put the situation into perspective.

“We have seen periods of uncertainty like this before — as recently as 2016 and 2018,” he said. “Then, as now, BlackRock stayed connected with our clients and across our platform. When investors were ready to put money back to work, they came to BlackRock, leading to record flows and share gains.”

It will be interesting to see if competitors like State Street (NYSE:STT), T. Rowe Price (NASDAQ:TROW), and Franklin Resources (NYSE:BEN) see similar trends when they release earnings in the weeks ahead.

As an asset manager, BlackRock is cyclical, so for the most part, it will move with the stock market. However, as the dominant player and market leader, it has a breadth of assets that helps it offset losses in one area of the market with gains in others.

However, it appears the company is looking to broaden its horizons through acquisitions. Fink said on the earnings call that BlackRock is “becoming increasingly engaged in M&A” discussions, adding that “times of uncertainty are often when transformational opportunities emerge.”

In addition to its fund flows, potential M&A activity is certainly something to monitor.

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