Organic Growth and Market Gains Lift BlackRock

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BlackRock closed out the December quarter with a record $6.288 trillion in managed assets. This was about $170 billion higher than our forecast, with most of the difference coming from market gains. Long-term net inflows of $80.6 billion marked the fifth straight quarter that the firm pulled in more than $75 billion in long-term quarterly inflows.

While iShares remains the largest driver of BlackRock's inflows, picking up another $54.8 billion in AUM during the fourth quarter, the firm also saw positive flows from its retail ($11.4 billion) and institutional ($14.4 billion) platforms. BlackRock's organic growth rate of 7.0% over the past four calendar quarters was comfortably above management's annual target rate of 5%.

That said, we believe some of the run-up in ETF flows this year was due to the dislocation created by the adoption of the Department of Labor's fiduciary rule, and we would expect organic growth to be tempered somewhat as we move forward.

BlackRock turned 21.6% average long-term AUM growth in the fourth quarter into 16.5% base fee revenue growth, as mix shift and fee compression weighed on results. Better performance fees year over year helped lift fourth-quarter firmwide revenue 20.0% year over year. Top-line growth of 12.0% for the full year was right in line with our 2017 forecast for low-double-digit revenue growth. With regard to profitability, BlackRock reported a 120-basis-point increase in full-year operating margins to 42.2% of revenue, when compared with 2016. The firm also raised its quarterly dividend 15% to $2.88 per share.

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