BlackRock (BLK +0.00%), the world's largest asset management firm, recently updated investors on its quarterly earnings. The firm's results were mixed, missing analysts' revenue estimates but blowing earnings expectations out of the water and beating those estimates by 28%.
The firm has a long history of increasing assets under management (AUM), which are integral to the investment firm's bottom line. However, BlackRock's AUM declined modestly from the previous quarter, and it saw outflows on its long-term investments of $12.6 billion. In this article, we'll dig into the details of the decline and what investors should do about it.
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Key Data Points
BlackRock's diverse product offerings is key to its long-term growth
BlackRock runs the world's largest asset management firm. Its $9.1 trillion in AUM puts it well ahead of its closest competitors, Vanguard ($7.2 trillion), Fidelity ($3.9 trillion), and The Capital Group ($2.3 trillion).
The key to BlackRock's success is its wide array of product offerings, from index products to exchange-traded funds, which include passively and actively managed investments. It offers 1,250 products that span asset classes, including equities, fixed-income, and alternative investments. Its primary source of revenue is derived from selling investment advice and fund fees, which are typically based on its total AUM.
Breaking down the firm's net asset flows from the third quarter
Boosting AUM is crucial to BlackRock's business. For that reason, investors pay attention to the firm's net flows and changes in AUM to gauge how the business is performing. Net flows represent how much cash flows in and out of BlackRock's product offerings and can provide insight into investors' behavior.
BlackRock saw $12.6 billion flow out of its fund offerings in the third quarter. The funds offer active and passive strategies in equities, fixed income, multiassets (like target-date funds), and alternative assets. The outflow surprised analysts, who expected to see $50 billion of inflows, according to analysts surveyed by Bloomberg.
While the outflows were unexpected, investors shouldn't be too concerned. The outflow from long-term investments shows that investors have shifted toward cash on hand in money market funds or other strategies, as interest rates remain high.
Chief Executive Officer Larry Fink said, "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 rerisking." BlackRock's cash management investments, which include money market funds and other cash-like investments, saw inflows of $15.2 billion, bringing total net inflows to $2.6 billion in the quarter.
Image source: Getty Images.
Putting the quarterly flows into the context of the bigger picture
BlackRock's AUM dropped $325 billion in the quarter, too. However, investors shouldn't be too concerned. The drop was primarily due to the declining value of investments in what proved to be a volatile quarter for most assets. The firm saw the market value of its assets decline by $258 billion in the quarter, while foreign exchange impacts reduced the total by another $71 billion.
The fact is that BlackRock's AUM is going to fluctuate based on market conditions. Investors are aware of this, so they pay close attention to the net inflows (or outflows) as a sign of how healthy the business is. Investors would have a reason for concern if there were a dramatic outflow from BlackRock's investments. However, that's not the case. Year to date, BlackRock's investments have seen $193 billion in net inflows, including $147 billion into its long-term products. Its AUM has also increased by $506 billion thanks to better market conditions this year than last.
BlackRock remains a solid holding for investors
BlackRock is an enormous investment firm, and it's common to see swings in its AUM from quarter to quarter. Although it saw outflows from its long-term investment products, inflows into cash management more than made up for it.
Its recent earnings aren't anything investors should be concerned about. Its performance remains solid, with revenue and net income up 5% and 14%, respectively, in the quarter. The firm continues increase AUM and expanding its business on a longer-term basis -- making it a solid stock shareholders should retain in their portfolios.
