(Adds active fund performance statistics)
By Trevor Hunnicutt
NEW YORK Oct 18 BlackRock Inc, the
world's largest asset manager, reported better-than-expected
quarterly profits on Tuesday, showing resilience in what has
been a punishing market for fund managers.
CEO Larry Fink nonetheless told Reuters his industry faces a
"hostile" environment as investors migrate to products like
index funds, which typically carry lower fees than actively
Even as BlackRock absorbed $55.1 billion in cash in its core
products, revenue fell 2.5 percent due to lower performance
fees. A favorable tax rate and income from non-core investments
helped the company beat analyst forecasts.
BlackRock has managed to stand above the fray because it
owns iShares, the leading exchange-traded fund brand. Still, its
transition from being primarily an active asset manager to a
more passive one has not been without pain.
"Even in these hostile headwinds that we see as an industry,
I think we will benefit over the long run," Fink said in an
Most recognizable ETFs charge low fees and aim to track the
market rather than beat it.
BlackRock sliced fees on some ETFs further during the latest
quarter to draw in new business. Investors are expected to leave
funds that pay brokers sales commissions due to an upcoming U.S.
Labor Department rule, and BlackRock has said its ETFs can
Overall, the company's net income rose 3.8 percent to $875
million, or $5.26 per share, in the third quarter from $843
million, or $5.00 per share, a year earlier.
After adjustments to strip out some compensation,
distribution and tax costs, BlackRock said it earned $5.14 per
share, beating the average analyst estimate of $5.00, according
to Thomson Reuters I/B/E/S.
At Sept. 30, the bond and index fund manager had $5.1
trillion in assets under management.
BlackRock's iShares ETF business took in $51 billion in new
money - more than double its inflows a year ago. It accounted
for 93 percent of the cash the company took into its long-term
funds, a grouping that excludes short-term cash accounts.
FUND MANAGERS HURTING
So far this year, investors have pulled $110 billion from
U.S.-based stock funds, according to Thomson Reuters Lipper.
"Active" funds, whose managers bet on specific stocks and
bonds, have lost $119 billion to cash withdrawals this year in
the United States, according to Morningstar Inc.
"The whole industry is feeling that," Fink said.
BlackRock's own active performance remains a source of
concern and diminished revenue, even as it took in new money
The company attracted $37 billion into long-term fixed
income investments and $13 billion in equities. Another $1.8
billion went into alternative investments, while its stock and
bond-picking franchise took in $4 billion.
Yet BlackRock's performance fees - which are usually earned
when a fund beats its target return - fell by 72 percent in the
Institutional clients withdrew money from one of its key
stockpicking groups, known as "scientific" active equity, as
performance has lagged over the past year. Just 31 percent of
assets managed by that unit are beating their benchmark over the
period, BlackRock said.
"Actively managed equity funds generate the highest
revenues," said CFRA Research analyst Erik Oja. "Clearly it's a
long-term downward trend for that."
INDEX FUND FUTURE
But analysts say index funds may be the future. BlackRock's
iShares business includes some relatively inexpensive "Core"
ETFs that track markets, as well as pricier ones, branded
"Edge," that attempt to copy and automate successful techniques
used by active managers.
One such product, iShares Edge MSCI Min Vol USA ETF (USMV)
, has been a bestseller since it launched five years
ago, even though other stock funds have been out of favor with
investors. It aims to deliver market returns with fewer price
swings, a claim that appears to be substantiated so far by
Lipper performance data.
"We feel like there will be more and more adoption," said
Rob Nestor, a BlackRock managing director who oversees USMV and
other so-called "smart beta" strategies in the United States. He
noted that it has become more difficult for active managers to
beat market returns.
Meanwhile, Aladdin, a risk-management technology BlackRock
uses and licenses to other investment firms, reported a 13
percent rise in revenue.
BlackRock shares rose about 0.6 percent on Tuesday afternoon
in New York. The stock has risen about 4.8 percent since the
beginning of the year, while a grouping of the company's peers
measured by the Dow Jones U.S. Asset Managers Index
fell by 3.4 percent.
(Reporting By Trevor Hunnicutt in New York; Additional
reporting by Sudarshan Varadhan in Bengaluru; Editing by Chizu
Nomiyama and Lauren Tara LaCapra)