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Stock Strategist

Solid Start to 2014 for World's Largest Asset Manager

We continue to be impressed by BlackRock's ability to generate organic growth.

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Despite the volatility in emerging and developing markets during the first quarter, which had a negative impact on flows for one of  BlackRock's (BLK) largest exchange-traded funds--iShares MSCI Emerging Markets (EEM)--the company closed out the period with a record $4.4 trillion in total assets under management, right in line with our projections. While total equity inflows of $3.8 billion were below our forecast of $13.9 billion, BlackRock more than made up for it with stronger inflows into fixed-income products, especially institutional index funds and ETFs (with iShares' $6.6 billion in net inflows representing the lion's share of total fixed-income ETF flows during the first quarter). Management continues to view fixed income as a growth area, especially in its ETF business, and we agree, having forecast stronger flows for BlackRock's fixed-income operations over the near  to medium term than we're willing to afford other fixed-income-heavy firms like Franklin Resources (BEN), Legg Mason (LM), and AllianceBernstein (AB).

With total AUM increasing 12% year over year and average AUM up 12% as well, BlackRock was able to post a 9% increase in revenue compared with the first quarter of 2013. An ongoing mix shift in the firm's portfolio toward lower-fee-generating products, along with the ongoing trend of declining fee rates for the industry overall, diminished the impact that BlackRock's AUM growth had on revenue. With top-line results during the first quarter slightly lower than our forecast, we've adjusted our full-year projections for revenue growth from 10% to a high-single-digit rate. BlackRock is, however, seeing much stronger operating leverage from its business than we were projecting, with operating margins exceeding 39% during the first quarter. This leaves the firm on pace to close out the year with margins about 50 basis points higher than our forecast. With full-year cash flows likely to end up about where we expected them to be, we see no reason to alter our $340 fair value estimate.

Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.