Less Volatile Markets, Flows Lift BlackRock's AUM

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Long-term net inflows of $55.2 billion were a marked improvement on the June quarter's $1.5 billion in total inflows and were slightly higher than our forecast for $51.2 billion in inflows for the period. This leaves organic growth over the past four calendar quarters at 3.5%, below management's annual target rate of 5% but in the middle of our own long-term forecast of 3%-4%. Based on our expectations for market performance and flows throughout the remainder of the year, we expect the firm to close out 2016 with more than $5 trillion in total AUM, driven by organic growth in the 3%-4% range.

While BlackRock's quarterly average AUM was up 8.4% year over year, third-quarter revenue declined 2.5% when compared with the prior-year period, as product mix shifts, declining fee rates, and lower performance fees detracted from the company's top line. While revenue was down 3.2% through the first nine months of 2016, we continue to expect BlackRock to produce slightly better results for the full year (albeit still in negative territory).

With regards to profitability, the company's operating margins of 40.5% through the first three quarters of 2016 were around 80 basis points lower year over year but do include a restructuring charge during the first quarter that cost BlackRock close to 300 basis points in margin. We still envision the firm closing out the year with operating margins in the 40%-41% range.

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