Blackrock this week reported an almost 25% increase in year on year quarterly earnings. Adjusted EPS stood at $3.47, with net income growth of 8% (17% as adjusted) from Q3 2011 on revenue of $2.3 billion.

The most interesting statistic by far was the strongest quarter of iShares flows since 2009, with over $25 billion of net inflows, including $21 billion into equity products. The firm post-2008 has built out its leadership in creating customized investment solutions for different clients and channels, with a heavy focus on alternatives, regardless of market movements. Alternatives this quarter were in outflows, but still contributed a high proportion of performance fees to the bottom line.

Chairman and CEO Larry Fink spoke of “record earnings per share up 23% from the prior year and margins over 40% through robust new business generation across each of our channels with particular strength in key growth areas on which we’ve focused, including Retail and iShares and our DC business“.

The emphasis on fixed income products combined with yield strategies for retail clients translated in the highest retail bond flows in over a decade, with $6.2 billion.

As retirement trends accelerate and assets continue to shift from defined benefit to defined contribution plans, the appetite for broader investment solutions continues to increase, and BlackRock is capitalizing on it. Fink pointed out $10.4 billion in defined contribution business, with particular strength in outcome-oriented solutions such as the LifePath portfolios.

BlackRock Solutions, another key growth priority for the firms, achieved a 9% increase in revenue for the business overall, and 18% year-on-year for the Aladdin trading and operating system.

Building on the $25 billion in cash contributions to iShares, BlackRock last week unveiled a few new aces from its sleeve:

– a new iShares Core series for buy-and-hold investors;

– a revitalized iShares brand campaign;

– integration of the U.S. iShares and BlackRock retail sales forces.

The initiatives are the first phase of a broader, global strategy to drive enhanced growth in the iShares platform.

A few other key points for the quarter:

– BlackRock had long-term inflows of $31 billion in Q3/2012. However, this excludes the effect of a single, low-fee, institutional index fixed income outflow of $74 billion, which BlackRock did not rebid on, citing extremely low fees.

– Total assets stood at $3.7 trillion as of September 2012, up 10% from a year ago. Net inflows in long-term products totaled $31 billion (excluding the above mentioned $74 billion outflow), reflecting equity, fixed income and multi-asset class product net inflows of $22 billion, $9 billion and $3 billion, respectively, partially offset by alternatives net outflows of $2 billion.

– Total cash flows also included cash management net inflows of $7 billion and planned advisory distributions of $19 billion. AUM also reflected market valuation gains, investment performance and the acquisition in September 2012 of Swiss Re Private Equity Partners, the European private equity franchise of Swiss Re.

– Long-term net flows from clients in the Americas and EMEA of $21.6 billion and $14.2 billion, respectively, stood in contrast to net outflows of $4.5 billion from Asia-Pacific. At quarter end, BlackRock managed 61% of long- term AUM for investors in the Americas and 39% for international clients.

– Retail AUM of $400 billion reflected net inflows of $5 billion and market and investment performance gains of $19 billion. U.S. retail and high net worth inflows of $3.5 billion showed diversification across asset classes, and continued strength in income-oriented products, such as a high yield bond funds with net inflows of $1.4 billion. Net inflows of $0.2 billion into alternatives products demonstrated BlackRock’s commitment to building a leading alternatives retail franchise.

– International retail net inflows of $1 billion marked a return to positive flows for the first time since the second quarter 2011, with fixed income net inflows of $1.7 billion partially offset by net outflows of $0.4 billion and $0.2 billion from alternatives and equities, respectively.

– iShares net inflows of $25 billion reflected positive net inflows across all asset classes, including net inflows of $21 billion into equity funds, demonstrating strong renewed investor demand for U.S. equity offerings. Fixed income and alternatives products included net inflows of $3.2 billion and $1.4 billion, respectively.

– U.S. iShares net inflows into equity funds totaled $17 billion as domestic equity products benefited from a risk-on sentiment taking hold in the latter part of the quarter. International iShares similarly showed signs of building risk appetite with equity net inflows of $4 billion led by net inflows into emerging market and pan- European products.

– Institutional active AUM increased 4%, or $31 billion, to $881 billion, including market and investment performance gains of $31.9 billion and $6.2 billion from the acquisition of Swiss Re Private Equity Partners. Multi-asset class products net inflows were $3.1 billion with continued growth from defined contribution plans generating strong inflows into target date and global asset allocation offerings.

– Alternatives net outflows were $2.9 billion, with modest private equity fund of funds net inflows of $0.1 billion offset by net outflows of $1.9 billion across other core alternatives offerings and net outflows of $1.0 billion from active currency. Net outflows from core products included return of capital on closed-end funds of $0.6 billion. Equity net outflows totaled $5 billion, reflecting outflows from active fundamental and scientific active equity (“SAE”). Fixed income net outflows of $2.6 billion reflected outflows from U.S. sector specialty mandates as asset allocation shifted in the latter part of the quarter.

– Institutional index AUM totaled $1.4 trillion at September 30, 2012, reflecting net inflows of $8.8 billion and market and foreign exchange valuation gains of $72.7 billion. Equity net inflows of $7.8 billion showed signs of shifting investor sentiments, with flows of $6.1 billion into regional and country-specific mandates, including emerging markets. Fixed income net inflows of $1.9 billion primarily reflected net inflows into U.S. core mandates.

– Cash management AUM increased 4%, or $8.9 billion, to $248 billion, with net inflows of $7.1 billion and market and foreign exchange gains of $1.8 billion.

– Advisory AUM declined 28% to $46.6 billion, primarily due to disbursements of Maiden Lane residual assets, marking the return of U.S. taxpayer funds.

– BlackRock Solutions (“BRS”) added 18 net new assignments during the quarter, including 1 Aladdin assignment, 2 risk management mandates, 1 FMA assignment, and 14 non-recurring advisory engagements. BRS also completed 9 short-term advisory assignments during the quarter.

– Net new business pipeline totaled $45 billion at October 11, 2012, including $33 billion in institutional index mandates and $8 billion in active mandates expected to fund in future quarters. In addition, the pipeline contains $10 billion of mandates funded since September 30, 2012. The unfunded portion of the pipeline primarily represents institutional assets, which account for approximately two-thirds of long-term AUM but only one-third of base fees.

– Performance fees were $103 million in Q3 2012 compared with $91 million in third quarter 2011, primarily reflecting higher performance fees from alternative products.

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(c) Enskat Associates 2012